annual report 2019the group established the 2nd medium-term management plan (integration stage) in...

2019Annual Report

Kyushu FG Securities 2019

Annual Report

Kyushu FG Securities

web_010_0293401371909.indd 2 2019/11/19 9:16:12

1 Profile

2 Message from the Management

4 Financial Highlights

6 Medium-Term Management Plan

8 Key initiatives in FY2018

10 Achieving Sustainable Growth ~Together with our customers and the region~

16 Corporate Governance

18 Compliance

20 Risk Management

22 Management

23 Review of Financial Results

24 Consolidated Financial Statements

59 Independent Auditors’ Report

60 Non-Consolidated Financial Statements

68 Corporate Data

Contents

CREATING A PROSPEROUS FUTURE TOGETHER WITH KYUSHU

1The Group will respond to the

trust and expectations of customers and will provide

optimal, high-level comprehensive financial services to its customers.

Group M anagement Phi losophy

2The Group will develop alongside

local regions and actively contribute in the realization of a

vigorous regional society and economy.

3The Group will nurture an

abundance of creativity and a free-spirited organizational culture, continuing to challenge itself to

move toward a better future.

This Annual Report contains certain forward-looking statements, including estimates, forecasts, targets and plans. Such forward-looking state-ments are based on the information available and the assumptions deemed reasonable by management at the time of publication of the Annual Report, and do not represent any guarantee by management of future performance. We are under no obligation, and disclaim any obligation, to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise.

Disclaimer regarding forward-looking statements

090_0293401371909.indd 2 2019/11/02 14:01:28

(As of the end of March 2019)

The Kyushu Financial Group was born in 2015 through the management integration of two banks in Kyushu: The Higo Bank based in the Kumamoto prefecture and The Kagoshima Bank based in Kagoshima prefecture.

Kumamoto prefecture and Kagoshima prefecture are blessed with abundant natural resources, and are among the top agri-cultural producers in Japan. And even with the continuing trend of aging farmers, the industry is steadfastly growing due to the expansion of overseas distribution channels.

Moreover, in the tourism industry, tourists from other parts of Asia have increased due to the addition of more flights to the re-gions, and other factors. The increase in consumption of foreign tourists has had significant positive effects on the local economy.

However, it is an undisputed fact that these regions are facing issues such as a dwindling and aging population against declin-ing birth rates, as well as low interest rates and economic contraction.

The Kyushu Financial Group aims to “become Kyushu’s top comprehensive financial group for customers.” We strive to improve every day as we work towards maximizing the potential of our integrated management while tackling various issues such as further revitalizing the region.

Profile

Kyushu Financial Group, Inc.

Location of head office: 6-6, Kinseicho, Kagoshima-shi, Kagoshima prefecture

Location of headquarters: 1, Renpeicho, Chuo-ku,Kumamoto-shi, Kumamoto prefecture

Business: Management of banks and companies that are permitted to be owned as subsidiaries under the Banking Act, and all other work incidental thereto

Capital: 36.0 billion yen

Fiscal year end: 31-Mar

Net Assets (consolidated): 652,317 billion yen

Total assets (consolidated): 10,444,589 billion yen

Listing exchange: Tokyo Stock Exchange, Fukuoka Stock Exchange

Accounting auditor: Deloitte Touche Tohmatsu LLC

Administrator of shareholder registry: Mizuho Trust & Banking Co., Ltd.

The Higo Bank, Ltd.

Established: July 25, 1925


Head Office: 1, Renpeicho, Chuo-ku, Kumamoto-shi, Kumamoto prefecture

Number of Branches: 124* (118 main branch and branches, 5 subbranches, 1 overseas representative office)

Number of Employees: 2,191*As of the end of July 2019

The Kagoshima Bank, Ltd.

Established: October 6, 1879


Head Office: 6-6, Kinseicho, Kagoshima-shi, Kagoshima prefecture

Number of Branches: 153* (115 main branch and branches, 15 subbranches, 21 agencies, 2 overseas representative office)


Kyushu FG Securities, Inc.

Established: June 1, 2017


Head Office: 1-13-5 Koyamachi, Chuo-ku, Kumamoto-shi, Kumamoto prefecture

Number of Branches: 4 (4 main branch and branches)

Number of Employees: 60

Long-term Ratings

Rating and Investment Information, Inc.



S&P Global Ratings Japan Inc.


A- A-A+ A+A+

1

090_0293401371909.indd 1 2019/11/02 14:01:29web_010_0293401371909.indd 3 2019/11/19 9:16:12

1 Profile

2 Message from the Management

4 Financial Highlights

6 Medium-Term Management Plan

8 Key initiatives in FY2018

10 Achieving Sustainable Growth ~Together with our customers and the region~

16 Corporate Governance

18 Compliance

20 Risk Management

22 Management

23 Review of Financial Results

24 Consolidated Financial Statements

59 Independent Auditors’ Report

60 Non-Consolidated Financial Statements

68 Corporate Data

Contents

CREATING A PROSPEROUS FUTURE TOGETHER WITH KYUSHU

1The Group will respond to the

trust and expectations of customers and will provide

optimal, high-level comprehensive financial services to its customers.

Group M anagement Phi losophy

2The Group will develop alongside

local regions and actively contribute in the realization of a

vigorous regional society and economy.

3The Group will nurture an

abundance of creativity and a free-spirited organizational culture, continuing to challenge itself to

move toward a better future.

This Annual Report contains certain forward-looking statements, including estimates, forecasts, targets and plans. Such forward-looking state-ments are based on the information available and the assumptions deemed reasonable by management at the time of publication of the Annual Report, and do not represent any guarantee by management of future performance. We are under no obligation, and disclaim any obligation, to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise.

Disclaimer regarding forward-looking statements

090_0293401371909.indd 2 2019/11/02 14:01:28


The Kyushu Financial Group was born in 2015 through the management integration of two banks in Kyushu: The Higo Bank based in the Kumamoto prefecture and The Kagoshima Bank based in Kagoshima prefecture.

Kumamoto prefecture and Kagoshima prefecture are blessed with abundant natural resources, and are among the top agri-cultural producers in Japan. And even with the continuing trend of aging farmers, the industry is steadfastly growing due to the expansion of overseas distribution channels.

Moreover, in the tourism industry, tourists from other parts of Asia have increased due to the addition of more flights to the re-gions, and other factors. The increase in consumption of foreign tourists has had significant positive effects on the local economy.

However, it is an undisputed fact that these regions are facing issues such as a dwindling and aging population against declin-ing birth rates, as well as low interest rates and economic contraction.

The Kyushu Financial Group aims to “become Kyushu’s top comprehensive financial group for customers.” We strive to improve every day as we work towards maximizing the potential of our integrated management while tackling various issues such as further revitalizing the region.

Profile

Kyushu Financial Group, Inc.

Location of head office: 6-6, Kinseicho, Kagoshima-shi, Kagoshima prefecture

Location of headquarters: 1, Renpeicho, Chuo-ku,Kumamoto-shi, Kumamoto prefecture

Business: Management of banks and companies that are permitted to be owned as subsidiaries under the Banking Act, and all other work incidental thereto


Fiscal year end: 31-Mar

Net Assets (consolidated): 652,317 billion yen

Total assets (consolidated): 10,444,589 billion yen

Listing exchange: Tokyo Stock Exchange, Fukuoka Stock Exchange

Accounting auditor: Deloitte Touche Tohmatsu LLC

Administrator of shareholder registry: Mizuho Trust & Banking Co., Ltd.

The Higo Bank, Ltd.

Established: July 25, 1925


Head Office: 1, Renpeicho, Chuo-ku, Kumamoto-shi, Kumamoto prefecture

Number of Branches: 124* (118 main branch and branches, 5 subbranches, 1 overseas representative office)


The Kagoshima Bank, Ltd.

Established: October 6, 1879


Head Office: 6-6, Kinseicho, Kagoshima-shi, Kagoshima prefecture

Number of Branches: 153* (115 main branch and branches, 15 subbranches, 21 agencies, 2 overseas representative office)


Kyushu FG Securities, Inc.

Established: June 1, 2017


Head Office: 1-13-5 Koyamachi, Chuo-ku, Kumamoto-shi, Kumamoto prefecture

Number of Branches: 4 (4 main branch and branches)

Number of Employees: 60

Long-term Ratings






A- A-A+ A+A+

1

090_0293401371909.indd 1 2019/11/02 14:01:29web_010_0293401371909.indd 1 2019/11/19 9:16:12

Message from the Management

The Kyushu Financial Group will aim to become a comprehensive finan-cial group which will be truly favored by customers and permanently contribute to the realization of a sustainable regional society.

President and Representative Director,

Yoshihisa Kasahara

Thank you for your continued support of the Kyushu Financial Group.

At the Board of Directors meeting held after the recent Ordinary General Meeting of Shareholders, I was honored to have been appointed

President and Representative Director. Together with the officers and employees of the Group, I will continue to work toward the further

growth and development of the region. I would like to take this opportunity to seek your further patronage and support.

between the United States and China, is expected to have an im-

pact, leading to the weakening of exports and capital investment.

The management environment surrounding regional banks will

remain severe due to population decline, the impact of negative

interest rate policies, and other factors. Banks will also need to take

action in response to digital technological innovations accompa-

nying the progress in FinTech.

Business environment

The Japanese economy in FY2 0 1 8 continued its path of moder-

ate recovery against a background of steady growth in the global

economy. Personal spending held firm based on improvements in

the income and employment environments, and, while there was

some weakness in housing investment and public spending, capi-

tal investment increased. On the other hand, while the economy is

projected to keep up its expansionary momentum, the slowdown

in overseas economies, including the effects of trade friction

Key initiatives in FY2018

The Group established the 2nd Medium-Term Management Plan

(Integration Stage) in April 2018. Aiming to be “Kyushu’s top com-

prehensive financial group for customers,” the Group is working on

enhanced corporate value and sustainable growth of the Group

with a basic strategy including three items: “evolution into a Group

that co-creates regional vitality,” “strengthening of Group’s human

resources,” and “raise the level of Group governance.”

During FY2018, the first year of the Plan, Kyushu FG Securities,

which began operations in January 2018, worked with both Higo

Bank and Kagoshima Bank (hereinafter “Both Banks”) on sales of

products that use a Kyushu FG Securities account. As a result of

the efforts to correspond to customers’ needs and requests, the

amount of sales of deposited assets (excluding public bonds and

insurance) through cooperation between banks and securities

reached 75.0 billion yen, showing a positive start.

To contribute to regional revitalization, the Group promoted

efforts on providing solutions for customers and regions such as

promoting investments and loans through funds jointly estab-

lished and invested in by Both Banks, identifying and nurturing

next-generation businesses through the “Kumamoto Tech Grand

Prix” and “Future Creation Plan Contest,” and support for strength-

ening businesses in the fields of agriculture, forestry, and fisheries

as well as promoting tourism.

With the aim of promoting the integration of the Group, we

have implemented ongoing exchanges involving transfers of

personnel, in addition to joint training. Also aiming to further

bolster benefits for Group employees and promote workstyle

reform, the Group introduced a unified “selective defined contri-

bution pension plan,” an early-morning work attendance system,

an interval work attendance system, and a staggered work at-

tendance system.

In addition, the Company has made the decision to construct a

head office building as a further exertion of the Group’s combined

strength. Not only bringing together head office functions and

raising productivity, we will also create an environmentally-friend-

ly, healthy, and comfortable office environment and contribute to

ensuring the safety of the region with the aim of improved safety

in the event of a large-scale disaster.

2

web_010_0293401371909.indd 2 2019/11/19 9:16:13

Initiatives in FY2019

Both Banks began their own trust businesses in April 2 0 1 9, which

was the first direct approach as a bank of a regional financial group

in Kyushu. Through connections between “banks, securities, and

trusts,” we will provide one-stop services matched to the customer’s

stage of life in terms of “saving,” “growing,” and “bequeathing.”

In April 2 0 1 9, Kagoshima Bank opened a representative office

in Taipei, which will strengthen its links with existing representa-

tive offices operated by Both Banks in Shanghai, and support the

broader development of customers.

In addition, in July 2019, the Company’s Fukuoka Building opened

in Fukuoka City, which will be tenanted by Group companies includ-

ing the Kagoshima Bank Fukuoka Branch, Higo Bank Fukuoka Branch

(Fukuoka corporate sales office), and the Kyushu Economic Research

Institute, and strengthen its function as a sales and information base

in Fukuoka.

Moreover, we will further promote the integration of the Group

and work on initiatives to improve productivity and raise the level

of Group governance.

Going forward, as a regional comprehensive financial group

with its main management foundation in South Kyushu, we will

work on connecting metropolitan/urban and overseas areas with

the region for evolution into a “Group that co-creates regional

vitality” so that a “vigorous regional society and economy” can be

achieved together with customers and local regions.

Kyushu Financial Group Fukuoka Building

Toward the realization of a sustainable regional society

The Group is working on initiatives to assist in sustainable eco-

nomic development and the creation of sustainable communities

in the region. To reinforce these initiatives further, we established

the Sustainability Management Office, with the goal of taking on

perspectives such as those of Sustainable Development Goals

(SDGs) drawn up by the United Nations, and of Environmental,

Social and Governance (ESG), in order to systematically manage

sustainable business activities for the Group as a whole. We also

drew up a “Sustainability Declaration,” becoming the first regional

bank in Kyushu to do so. In addition to social contribution activi-

ties such as nature conservation, the Group is reinforcing initia-

tives aimed at resolving issues faced by the region and society.

Initiatives for the creation of a sustainable society

We will work on the creation of a society where each customer and person in the region can feel happiness and satisfaction over the future through environmentally-friendly management practices.

Initiatives for growth of the regional economy

We will contribute to the sustainable growth of the regional economy by making full use of the strengths of a regional comprehen-sive financial group, and assisting custom-ers and local regions in solving their issues.

Initiatives for dissemination and expansion

We will have closer dialogue with custom-ers and local regions, and expand our net-work of activities to make the overall region a sustainable society.

We, the Kyushu Financial Group, support the concept of SDGs established by the United Na-tions and declare that officers and employees of the Group will responsibly work on the SDGs.Sustainability Declaration

1. 2. 3.

Our mission

The Group aims to be “Kyushu’s top comprehensive financial

group for customers,” and provides comprehensive financial

services tailored to each of our customers in addition to mak-

ing lasting contributions to the creation of sustainable regional

communities that take into account the special characteristics of

the region.

We sincerely appreciate your further support and encourage-

ment.

3

web_010_0293401371909.indd 3 2019/11/19 9:16:13

Financial Highlights

(Millions of yen)

Item Year ended March 31, 2019 Year-to-year change Year ended March 31, 2018

Ordinary income 170,322 5,625 164,696

Ordinary profit 33,717 4,336 29,381

Net income attributable to owners of the parent 22,202 2,807 19,395

Capital adequacy ratio 11.34% (0.45%) 11.79%

(Millions of yen)


Ordinary income 75,658 5,229 70,428

Gross income from business 52,174 (29) 52,203

Expenses 36,129 (1,056) 37,186

Net income from core business 15,614 894 14,720

Net income from business 16,177 3 16,173

Ordinary profit 18,170 199 17,971

Net income 12,495 183 12,311

(Millions of yen)

(Millions of yen)


Ordinary income 65,327 (1,415) 66,742

Gross income from business 51,646 4,726 46,920

Expenses 33,601 (257) 33,858

Net income from core business 18,410 1,350 17,060

Net income from business 18,428 1,635 16,793

Ordinary profit 17,418 1,707 15,711

Net income 12,024 1,033 10,991


Operating revenue 1,018 999 18

Ordinary profit (137) 381 (518)

Net income (140) 380 (520)

Profit and loss


4

web_010_0293401371909.indd 4 2019/11/19 9:16:13

(100 mil. yen) Public funds, etc.CorporateIndividual

End of Mar.2017

End of Mar.2018

82,976

19,936

6,900

56,138

End of Mar.2019

85,907

20,852

7,557

57,497

85,813

21,120

6,329

58,362

Deposits(Non-consolidated total of the two Banks)

(100 mil. yen) Public sectorIndividual Corporate

End of Mar.2017

End of Mar.2018

61,111

20,974

9,461

30,675

End of Mar.2019

64,863

22,658

10,063

32,141

68,960

24,257

10,536

34,166

Loans(Non-consolidated total of the two Banks)

(100 mil. yen) Core Capital

End of Mar.2017

Capital adequacy ratio

End of Mar.2018

5,833

12.38%

End of Mar.2019

5,889

11.79%

6,015

11.34%

Capital Adequacy Ratio (KFG Consolidated)


End of Mar.2017

End of Mar.2018

37,460

9,191

2,580

25,688

End of Mar.2019

38,966

9,776

2,710

26,479

39,582

10,104

2,489

26,988

Deposits (Kagoshima Bank)

Deposited assets Commission received

(100 mil. yen)

End of Mar.2017

End of Mar.2018

30,501

15,355

4,447

10,698

End of Mar.2019

32,398

15,791

4,772

11,834

34,075

16,549

4,677

12,849

Public sectorIndividual Corporate

Loans (Kagoshima Bank)


End of Mar.2017


End of Mar.2018

2,684

11.20%

End of Mar.2019

2,703

10.72%

2,766

10.35%

Capital Adequacy Ratio (Kagoshima Bank)


End of Mar.2017

End of Mar.2018

45,515

10,744

4,320

30,450

End of Mar.2019

46,941

11,076

4,847

31,018

46,230

11,016

3,839

31,374

Deposits (Higo Bank)

(100 mil. yen)

End of Mar.2017

End of Mar.2018

30,610

15,320

5,013

10,276

16,349

10,823

Public sectorIndividual Corporate

End of Mar.2019

32,464

5,291

17,617

11,408

34,884

5,858

Loans (Higo Bank)


End of Mar.2017


End of Mar.2018

2,591

11.52%

End of Mar.2019

2,662

11.08%

2,748

10.73%

Capital Adequacy Ratio (Higo Bank)

2,131 20,807(Reference) Number of accounts opened

Number of accounts (Number of accounts with balances)

60,616

42,64642,646

7,139

10,83010,830711

221

2,1201,187

(Millions of yen)Equity securitiesDebt securitiesBene�ciary certi�cates, etc.

End of Mar.2018

End of Mar.2019

Brokerage commission14,721

Fees for o�ering, secondary distribution and solicitation for selling and others for

professional investors185,013

Other commission

received26,904

(Year ended March 31, 2019)

226,639

(Thousands of yen)

169

11,649

146

11,17511,175

23

474

(Number of accounts)IndividualCorporate

End of Mar.2018

End of Mar.2019

5

web_010_0293401371909.indd 5 2019/11/19 9:16:14

Given structural problems in the region and the management environment surrounding regional financial institutions, the Kyushu Financial

Group identified the following as the Group’s management challenges: “contributing to local revitalization,” “enhancing comprehensive

financial capability,” “raising the level of Group governance,” and “enhancing human resource development.” In order to grow as a regional

comprehensive financial group together with customers and local regions, the Group established the 2nd Medium-Term Management Plan

for enhanced corporate value and sustainable growth.

October 2015 April 2018 April 2021

Positioning of the Group’s 2nd Medium-Term Management Plan

Group’s 1st Medium-Term Management Plan

[Collaboration Stage]

Establish a management foundation to provide the optimal

and best services to customers

Basic policy

1“Comprehensive financial capability”

to meet various customer needs

2“Branding”

trusted by stakeholders

3“Organization management capability”

to optimize the entire Group

Three management bases

Group’s 2nd Medium-Term Management Plan[Integration Stage]

Based on management foundations built in the Collaboration Stage, the Group will work on integration of the Group with a sense of urgency to be-come “Kyushu’s top comprehensive financial group for customers” and tie that into sustainable growth.

Quality of parent

Collaboration synergy

Integration synergy

Group synergy

Kyushu’s top

comprehensive

financial group for

customers

Medium-Term Management Plan

The “Integration Stage,” which maximizes group synergy based on

the management foundation built in the Collaboration Stage

6

web_010_0293401371909.indd 6 2019/11/19 9:16:15

Basic policy

1. Enhancement of regional comprehensive financial functions

2. Demonstration of function of promoting regional industry

1. Enhancement of human resources management

2. Enhancement of human resources development

1. Enhancement of business management structure

2. Improvement of productivity

Maximizing group synergy toward providing the optimal and best services to customers

Evolution into a Group that co-creates regional vitality

Strengthening of Group’s human resources

Raise the level of Group governance

1

2

3

Basic strategy Strategic pillars

Item Target for final year Results for FY2018 Reference

Growth

Average balance of loans ¥7.6 trillion ¥6.7 trillionSimple sum

of two banksAverage balance of deposits/NCD ¥9.2 trillion ¥8.5 trillion

Profitability

Net income ¥25,000 million ¥22,200 million

Consolidated

Business profits from services provided to customers*

¥14,000 million ¥12,100 million

Return on shareholders’ equity 4% level 3.7%

Efficiency OHR Under 70% 68.2%

Financial soundness

Capital adequacy ratio 10% or higher 11.34%

* Business profits from services provided to customers:Average balance of loans × interest margin for loans and deposits + fees and commissions – expenses

Numerical targets

The “Integration Stage,” which maximizes group synergy based on

the management foundation built in the Collaboration Stage

7

web_010_0293401371909.indd 7 2019/11/19 9:16:18

091_0293485681907.indd すべてのページ 2019/07/24 19:49:22091_0293485681907.indd すべてのページ 2019/07/24 19:49:22

Key initiatives in FY2018

With the launch of trust businesses by Both Banks from April 2019, we became the first regional financial group in Kyushu to have put

in place within the group a system that enables the provision of one-stop services matched to customer needs such as inheritance, or

to the customer’s stage of life in terms of “saving,” “growing,” and “leaving.” Going forward, we will work to provide even more specialized

financial products and services, so as to respond to the diversification of customer needs.

Establishing connections between “banks, securities, and trusts”

Provide one-stop comprehensive financial services through connections between banks,

securities, and trusts

Bank

Exploring potential needs and make one-stop proposals based on trust relationships with cus-tomers

Reinforce relationships by provid-ing various channels

Trusts

High expertise for passing on assets

Realization of customer’s wants for passing on assets

High expertise for asset man-agement

Proposals for sophisticated management approaches

Promotion of investment trusts, structured bonds, etc.

Securities

8

web_010_0293401371909.indd 8 2019/11/19 9:16:19

091_0293485681907.indd すべてのページ 2019/07/24 19:49:22091_0293485681907.indd すべてのページ 2019/07/24 19:49:22

In order to nurture professional personnel and construct a framework for the optimal allocation of human resources to realize the strategy,

the Group will work on the enhancement of human resources management and human resources development.

Strengthening the Group’s human resources

Enhance regional comprehensive financial functions/

demonstrate function of prom

oting regional industry

Realize strategic allocation of human resources

Group’s unified platform (facilitating integration of human resources departments)

Enhancement of human resources management and human resources development

Strengthening of Group’s human resources (increase human resources based on the strategy)FY2020

FY2019

FY2018

Develop capabilities of the Group’s human resources (e.g., development of capability data management tools)

Integration of personnel systems and facilitation of personnel utilization Preparation for establishing a body specialized in nurturing human resources in the Group and region

Drastic reform of hiring methods

Hiring Integration of programs (holding 11 joint job fairs, introduction of common tools for hiring and public relations, etc.)

Establishment of unified Group hiring management

System (benefits) Decision on introduction of a unified “selective defined contribution pension plan” throughout the Group in FY2020

Workstyle reform Introduction of “early-morning work attendance system,” “interval work attendance system,” and “staggered work attendance system,” and study on introducing “flextime” Starting trials for teleworking (introduction of “peeping pre-vention system” using face recognition technology)

Development Implementation of “next-generation leadership development training” (January 2018 - March 2019) *to be continued in FY2019

Joint implementation of overseas training for branch chiefs and junior/mid-level employees, and training for new employees

Personnel exchanges (20 employees: one year, six branch chiefs: two years) to be continued

Joint training for new employees Joint overseas training Personnel exchanges

Teleworking

9

web_010_0293401371909.indd 9 2019/11/19 9:16:19

Sustainability Declaration Key issues addressed by the Kyushu Financial Group for the creation of sustainable regional communities

We, the Kyushu Financial Group,

support the concept of SDGs

established by the United Nations

and declare that officers and em-

ployees of the Group will respon-

sibly work on the SDGs.

Initiatives for the creation of a sustainable society

We will work on the creation of a society where each customer and person in the region can feel happi-ness and satisfaction over the future through environmentally-friendly management practices.

Initiatives for growth of the regional economy

We will contribute to the sustainable growth of the regional economy by making full use of the strengths of a regional comprehensive financial group, and assisting customers and local regions in solving their issues.

Initiatives for dissemination and expansion

We will have closer dialogue with cus-tomers and local regions, and expand our network of activities to make the overall region a sustainable society.

1

2

3

Key issues

Creation of an

environmentally

friendly region

Creation of a

regional

foundation to

support

all people

Creation of a

workplace and

region where all

people take an

active part

Creation of an

organization

needed from

the region

Group Management Philosophy

The Group will respond to the trust and expectations of customers and will pro-vide optimal, high-level comprehensive financial services to its customers.

1

The Group will develop alongside local regions and actively contribute in the realization of a vigorous regional society and economy.

2

The Group will nurture an abundance of creativity and a free-spirited organiza-tional culture, continuing to challenge itself to move toward a better future.

3

Regional structural issues

Population outflow

Low birthrate, aging population

Shrinkage of regional industry

The Kyushu Financial Group works to solve various issues concerning customers and the region from environmental, social,

and governance perspectives, in order to contribute to the sustainable development of regional society and economy and

increase corporate value through these initiatives.

Achieving Sustainable Growth~Together with our customers and the region~

10

web_010_0293401371909.indd 10 2019/11/19 9:16:21

Key issues addressed by the Kyushu Financial Group for the creation of sustainable regional communities

Actions taken Related SDGs

Practice environmentally responsible management and nurturing envi-ronmental awareness in the region

Three pillars of groundwater conservation activities[Forests] Cultivate watershed protection forests: Tree planting in

Aso Daikan no Mori [Rice paddies] Utilize watershed protection functions: Rice planting in

Aso Mizukake no Tanada (Aso terraced rice paddies) [Grass fields] Conserve watershed protection functions: Maintaining

Aso no Sogen (Aso grassland) Promotion of disaster-resistant towns Promotion of ESG-related investments and loans Support for commercialization by utilizing regional resources Initiatives for CO2 reduction such as reduction of use of paper resources

Strengthen initiatives for promoting regional industry and supporting reconstruction

Provide support for regional vitalization through support of business succession

Provide fair financial services in the era of FinTech, IT, and cashless trans-actions

Provide financial services without regional disparity Nurture awareness of support for the socially vulnerable Support to eliminate regional disparity in healthcare

Provide financial products and services tailored to diverse needs Practice health management, and support for health enhancement for customers and regions

Strengthen initiatives to empower women Implement financial education activities for improved financial literacy and provide equal opportunities for education

Nurture personnel who solve customer and regional issues Enhancement of systems to promote diversified work styles

Ongoing practice of Group’s sound management Eliminate anti-social forces and eradication of social misconduct Develop alliances and trends to take region-wide initiatives for realiza-tion of a sustainable society

Become Kyushu’s

top comprehensive

financial group for

customers

Vision

11

web_010_0293401371909.indd 11 2019/11/19 9:16:24

Governance In March 2 0 1 9, deliberations on the “Guideline for Investments and Loans” were made at the Group Management Council to promote investments and loans that would solve environmental and social issues including climate change, with a report made to the Board of Directors

Strategy

Identify environmental and social issues to be addressed with priority (identify material issues for the entire sustain-ability framework)

Support for decarbonation initiatives (reduction of CO2) under the “Guideline for Investments and Loans” Initiatives for promotion of renewable energy

Risk management

Establish a comprehensive risk management system including credit risk management and operational risk management

Goal and numerical targets

Calculate greenhouse gas emissions for Higo Bank and Kagoshima Bank

The Kyushu Financial Group is engaged in environmentally responsible management through business activities and various social contribution activities to protect the region’s rich natural environments and ensure that they can be enjoyed for generations to come.Environment

Amount of environment-related financing

¥14.1 billion

Balance of environmentally responsible time deposits

¥212.5 billion

Support for recommendations of the Task Force on Climate-related Financial Disclosures

In 2019, we showed our support for the recommendations of the “Task Force on Climate-re-

lated Financial Disclosures (TCFD*).” We will proceed with analysis of risks and opportunities

of businesses affected by climate change, and counter them through disclosure of related

information.

* The private sector-led task force was established according to the recommendations of the Financial Stability Board in December 2015 for the purpose of reinforced disclosure of corporate information concerning climate change.

Participation in the TCFD Consortium

For the effective disclosure of climate-related information, we take advantage of the TCFD Consortium (*) and exchange information with

other corporations and financial institutions which support these recommendations.

*TCFD ConsortiumEstablished on May 27, 2019, as a body for discussions on initiatives for effective information disclosure by companies and for proper investment decisions by financial institutions based on information disclosed.

12

web_010_0293401371909.indd 12 2019/11/19 9:16:24

As a part of environmental conservation activities, Kagoshima Bank

signed the “Kagoshima Environment Partners Agreement” with

Kagoshima Prefecture. Based on this Agreement, we participate

in the “afforestation project by companies to nurture the environ-

ment” and work on forest management focused on thinning. With

the expansion of the afforestation project, we will contribute to

environmental conservation by reinforcing forest functions to ab-

sorb CO2 and other multilateral functions such as landslide disaster

prevention.

Tackling environmental issues through social contribution activities (Eco-friendly bank branches, groundwater conservation activities, etc.)

Higo Bank is working on groundwater conservation activities with

“forests,” “rice paddies,” and “grasslands” as the three pillars.

Forests

Cultivate watershed protection forestsTree planting in Aso Daikan no Mori

Number of trees planted: 130 thousand trees (cumulative total)

Rice paddies

Utilize watershed protection functionsRice planting in Aso Mizukake no Tanada (Aso terraced rice paddies)

Rice planted area: 10 ha (cumulative total)

Grass-lands

Conserve watershed protection functionsMaintaining Aso no Sogen (Aso grassland)

We are carrying out initiatives to promote tourism at the national

park areas located in Kumamoto and Kagoshima, out of the eight

national parks designated by the Ministry of the Environment’s

“Project to Fully Enjoy National Parks.”

The Group aims at creating its branches to be in harmony with

the townscape, with consideration on environmental aspects and

barrier-free designs.

Three pillars of groundwater conservation activities

“National Park Official Partner” agreement

Kagoshima Environment Partners Agreement

Creation of eco-friendly bank branches

Eco-friendly bank branchAso Kuju National Park Kirishima-Kinkowan National Park

Related

SDGs

13

web_010_0293401371909.indd 13 2019/11/19 9:16:25

*The amount of joint funds indicates cumulative results from October 2015 to March 2019 while other items indicate results for FY2018.

Comprehensive Collaboration Agreement on Regional RevitalizationKumamoto City, Aso City, Uki City, and Mashiki Town Collaboration Agreement on Utilization of Historic Buildings, etc.Hitoyoshi City and Kosa Town

Agreement relating to Mutual Cooperation and Collaboration for Regional RevitalizationMinamikyushu City, Satsuma Town, Kirishima City, Kimotsuki Town, Ebino City, and Ibusuki City Comprehensive Business Cooperation Agreement, etc.Hioki City, Satsumasendai City, Minamisatsuma City, Tarumizu City, and Kanoya City

Joint funds

Cumulative total*

Loans executed for supporting restoration¥8.7 billion ¥234.7 billion

Aiming at realizing a “vigorous regional society and economy” which is essential

for sustainable regional development, we have partnership agreements with local

governments concerning regional revitalization and utilization of regional resources

such as historic buildings and agricultural products.

Partnerships with local governments

We held a contest to support entrepreneurs and

students who are going to take a new step with

a vision for regional vitalization and nurturing

venture-minded people.

Support for founders

“YOCADO KAGOSHIMA,”

a commercial facility

located on the first and

second floors of the

Annex Building, Head

Office, Kagoshima Bank, opened in June 2019, in-

troduced cashless settlement at all stores. Through

taking active initiatives as a bank that handles

cash, the bank is facilitating the spread of cashless

settlement in the region.

Promotion of cashless transactions

Regional revitalization

Higo Bank

Kagoshima Bank

We actively work on such initiatives as “support for balancing work with childcare

and nursing care,” “training for career development,” and “work style reform.”

Empowerment of women

In-house daycare centers are established to pro-

vide an environment where people can work and

raise children without worry.

In-house daycare centers

Diversity and work-life balance

Higo Bank Number of staff who took childcare leaveKagoshima Bank Number of staff on

short-time working

Female managers As of March 31, 2019 Childcare support Results in FY2018

24people

135people

11people

46people

Kagin Daycare Center Yumeiro

Higokko no Mori Daycare Center

The Kyushu Financial Group will support regional long-term growth and create a “vigorous regional society and economy” together with local regions and customers by demonstrating regional comprehensive financial functions and regional industry promotion function.Society

14

web_010_0293401371909.indd 14 2019/11/19 9:16:27

Promotion of culture and sports

In commemoration of the issuance of privately-placed bonds by our partners, we donate educational materials and other goods to schools designated by our partners. We are actively working on offering learning opportunities including study, sports, and cultural activities for children to encourage their future growth.

Privately-placed bonds that include donations

Regional contribution

In addition to support and volun-teering activities for the Kumamoto Castle Marathon and Kagoshima Marathon, we have entered into contracts as an official partner of Kagoshima United FC (soccer team) and Kagoshima Rebnise (basketball team) to take active initiatives for promoting sports.

Support for local sport teams

Commemorating the official partner contract with Kagoshima United FC

Social contribution

HarmoniCar, a bank on wheels, is operated with the goals of improving customer conve-nience and facilitating business continuity planning (BCP) during times of disaster. We provide financial services in areas with few bank branches, event sites, and other various places.

Bank on wheels

The Group’s donated a total

amount of 2.0 billion yen in three

years to help recover and restore

cultural artifacts affected by the

Kumamoto Earthquake, such as

Kumamoto Castle and Aso Shrine.

Recovery and restoration of cultural artifacts

Donation ceremony

The “Hajimetebako (first box)” is handed out to families raising children in Ka-goshima Prefecture. Kagoshima Bank offers goods featuring our original character “SHIRODON” to encourage the healthy growth of children who will cre-ate the future.

Sponsorship for Smile Baby Project

Hajimetebako (first box)

As an official sponsor of the

Women’s Handball World Cham-

pionship 2 0 1 9, we contribute to

regional vitalization through

sports.

Sponsorship for Women’s Handball World Championship

Sponsorship for Women’s Handball World Championship 2019

As a part of financial education for elementary school students, a “money class” is conducted every year. In 2019, an SDGs learning program was launched for children to develop their “skills for living sustainably.” We also hold the Kagoshima regional tournament of the All Japan High School Economics Quiz Tourna-ment (Economics Koshien).

Financial education

Money class

We are working to contribute to the region through athletic sports by pro-

viding opportunities for female track and field athletes within the prefecture.

Promotion of regional sports

Higo Bank Women’s Ekiden Club Kagoshima Bank Athletics Club

Related

SDGs

15

web_010_0293401371909.indd 15 2019/11/19 9:16:30

Corporate Governance

Basic Philosophy on Corporate Governance Kyushu Financial Group, Inc. is the holding company of a regional financial group that has under its aegis The Higo Bank, Ltd., THE

KAGOSHIMA BANK, LTD. and Kyushu FG Securities Establishment Pre-Opening, Inc. Our Group has established the Group manage-

ment philosophy, and in order to implement it, adheres to laws and regulations and works to carry out appropriate business decision

making and operations, while striving to enhance the corporate governance by improving management transparency, openness and

soundness.

In addition, our Group has established and released “Corporate Governance Guidelines” for the sustainable growth of the Group

and the improvement of medium to long-term corporate values. Officers and employees of our Group share these “Corporate

Governance Guidelines,” fully understand the intent and are putting it into practice.

(URL: https://www.kyushu-fg.co.jp/company/governance.html)

Corporate Governance System Over view A system where the Board of Directors of the Company, comprising 10 Directors (including 2 Outside Directors), supervises manage-

ment decision making and execution of the duties of the Directors and the 5 Corporate Auditors (including 3 Outside Corporate

Auditors) and the Board of Corporate Auditors audit execution of company operations is determined appropriate for the improvement

of management efficiency and the strengthening of corporate governance, and thus the Company currently takes the form of a com-

pany with Board of Corporate Auditors.

Board of Directors and DirectorsThe Board of Directors comprises 8 Directors from the Group who are thoroughly familiar with the financial business, as well as 2

Outside Directors who have a high degree of independence in supervising the entire management of the Group from a neutral and

objective perspective. The main role of the Board is making decisions on matters stipulated by laws and regulations and the Articles of

Incorporation, as well as important operational matters related to the management of the Group, and supervising execution of the du-

ties by the Directors.

Board of Corporate Auditors and Corporate AuditorsThe Board of Corporate Auditors comprises 2 Corporate Auditors from the Group who are thoroughly familiar with the financial busi-

ness and possess suitable knowledge of finance and accounting, as well as 3 Outside Corporate Auditors (including 1 female Corporate

Auditor) who have a high degree of independence in conducting audits to secure Group soundness and legality from a neutral and

objective perspective. The Board carries out audits of the operations and financial conditions of the Group based on the Standards for

Audits Conducted by Corporate Auditors, etc. auditing standards set by the Board.

Nominating and Remuneration Committee

This Committee meets to discuss matters related to the nomination and remuneration of management and Corporate Auditors with

the aim of providing a venue for Representative Directors and outside officers to exchange opinions, etc., to raise the transparency and

fairness of the decision-making process, and to assist in strengthening corporate governance.

Group Management CouncilThe Group Management Council comprises the Representative Directors and Directors, etc., and discusses and decides matters en-

trusted to it by the Board of Directors as well as deliberates important matters regarding management, and works to enrich and en-

liven deliberation for prompt and decisive decision making.

16

web_010_0293401371909.indd 16 2019/11/19 9:16:30

CommitteesIn order to effectively, efficiently and promptly respond to the cross-organizational issues of the Group, the following 5 committees

have been established, and they regularly meet to discuss the matters under their respective jurisdictions.

(Organizational Integration and Headquarters Building Construction Committee)

Combines Group organization and functions (integration, consolidation and unification), and conducts discussions on construction of

the headquarters building

(New Business Development Committee)

Mainly discusses new businesses that contribute to strengthened consolidated Group revenue, the development of new revenue

streams, as well as new markets in and outside Japan and in the Group’s business domain

(Digital Innovation Committee)

Formulates policies and strategies for utilizing and developing a foundation for digital technology that transforms the Group’s marketing,

business processes, and other areas, and discusses their realization and effectiveness

(Comprehensive Budgeting Committee)

Formulates the Group comprehensive budget based on the Medium-Term Management Plan, manages progress and operates the risk

appetite framework

(ALM Committee)

Comprehensively manages assets and liabilities for the entire Group, and performs revenue management against risks

(CR Committee)

Manages the Group’s strict compliance with laws, regulations, customer protection and other issues, as well as comprehensively manages

such points as operational risk

Related

SDGs

General Meeting of Shareholders

Group Management Council

Board of Corporate Auditors

Audit Division

The Higo Bank Group Kyushu FG SecuritiesThe Kagoshima Bank Group

Each division

Appointment/Dismissal

Appointment/Dismissal

Tabling of Issues/Reports

ManagementConsultation/Report

Accounting Auditor

Accounting Audit

Audit Report

Audit Report

Internal Audit

Collaboration

Collaboration

Audit

Collaboration

Audit Appointment/Dismissal

Corporate Auditors/Outside Corporate Auditors

Board of DirectorsDirectors/Outside Directors

Organizational Integration and HeadquartersBuilding Construction Committee

New Business Development CommitteeDigital Innovation Committee

Comprehensive Budgeting CommitteeALM CommitteeCR Committee

Committees

Cons

ultati

on/R

epor

t Nominating and Remuneration

Committee

Corporate Governance Framework

17

web_010_0293401371909.indd 17 2019/11/19 9:16:31

Compliance

Compliance Basic Polic y The Group positions compliance as one of the most crucial management issues, and we are engaged in thorough compliance based

on the following three principles.

1. We recognize our social responsibilities and public mission, and we earn the trust of society through the sound and appropriate op-

eration of our business.

2. We adhere to laws and regulations, rules and internal regulations, and we carry out sincere and fair corporate activities based on so-

cial norms and management philosophy.

3. In order to ensure the soundness and appropriateness of our business operations, we break off any relations with anti-social forces,

etc. that threaten the order and safety of society.

Compliance Management System The Group has established the “Compliance Basic Policy,” which

sets out our basic position and thinking towards compliance,

and we are engaged in thorough compliance.

The Group has established a Compliance and Risk

Management Division as a division to oversee compliance mat-

ters of the Group, and convenes the Compliance Committee

with the President as its chairperson. In the Committee we re-

port and hold discussions on the status of compliance manage-

ment and the status of management against anti-social forces,

in our efforts to maintain and enrich our compliance system.

Additionally, we have formulated a compliance program as

a specific practical plan to achieve thorough compliance and

by doing so we are engaged in the strengthening of our com-

pliance system.

(Secretariat O�ce) Compliance and Risk Management Division


Board of Directors

Compliance Committee

Compliance managementManagement of customer protection, etc.Management against anti-social forces, etc.

The HigoBank Group

The KagoshimaBank Group


Init iatives for preventing money laundering, etc . With the Group’s recognition that the deterrence of organized crime by preventing money laundering and terrorism financing (“money

laundering, etc.”) is a universal issue, the Group is fully committed to preventing money laundering, etc., as one of the highest priori-

ties in the management of its business, and complies with all relevant laws and regulations to address the issue. Specifically, the Group

establishes unified policies and regulations for the issue throughout the Group, ensures conducting checks at the time of transaction,

detects any unusual transactions through systems and other tools, and makes notification on any suspicious transactions to prevent

money laundering, etc.

[Basic Policies for Preventing Money Laundering and Terrorism Financing]

Kyushu Financial Group (hereafter, “Kyushu FG”) is fully committed to preventing money laundering, etc., as one of the highest priorities

in the management of its business. As such, Kyushu FG shall comply with all relevant laws and regulations, and shall establish effective

control environments.

1. Involvement of management

The management fully understands that money laundering, etc., can be a major operational risk to Kyushu FG. Therefore, Kyushu FG

shall come up with a system of sophisticated measures to prevent money laundering, etc. in an independent and proactive manner.

2. Risk-based approaches

Kyushu FG shall take into consideration the results of national risk assessments (National Risk Assessment of Money Laundering and

Terrorist Financing) etc., as part of comprehensive and concrete investigations on risks pertaining to its products and services, forms

18

web_010_0293401371909.indd 18 2019/11/19 9:16:31

E xclusion of Anti -Social Forces The Group is resolutely against anti-social forces who pose a threat to the order and safety of civil society, and we are carrying out ef-

forts to create a system that blocks out relations with anti-social forces, as well as making efforts to eradicate all dealings with anti-

social forces. Specifically, we are strengthening our response towards the exclusion of dealings with anti-social forces through the

creation of a response policy and regulations, etc. against anti-social forces, the expansion of Group-wide anti-social forces database,

and the introduction of anti-social forces exclusionary provisions in our legal contracts.

(Basic Response Policy to Anti-Social Forces)

The Group is resolutely against anti-social forces who pose a threat to the order and safety of civil society, and we have formulated the

following basic policy to block all relations with anti-social forces based on our “Compliance Basic Policy.”

1. Any inappropriate demands by anti-social forces shall be met with a legal response, both civilly and criminally, by the entire

organization.

2. Close relations shall be built from peacetime with outside specialist organizations, such as police and lawyers, etc., to prepare a re-

sponse against anti-social forces.

3. All ties that include business dealings shall be blocked with anti-social forces.

4. Absolutely no funding shall be provided and no profits granted to anti-social forces.

5. A management position, etc. shall be prepared to exclude anti-social forces and prevent any business dealings.

of transactions, regions and countries involved in transactions, and customer attributes. Kyushu FG shall identify and assess potential

risks like money laundering, etc., and shall come up with suitable measures to reduce risks.

3. Customer management

Kyushu FG shall conduct appropriate checks at the time of transaction and manage customers in accordance with the customer’s

attributes and the transaction at hand. In addition, Kyushu FG shall conduct regular surveys and analysis of transaction records and

revise its customer management measures accordingly.

4. Economic sanctions and the freezing of assets

Kyushu FG shall take appropriate approaches to dealing with those who are the target of economic sanctions, including the cessa-

tion of business relations and the freezing of assets.

5. Notification of suspicious transactions

Kyushu FG shall take appropriate steps to notify the authorities in the event it encounters suspicious transactions in the course of its

routine work and monitoring. In addition, if necessary, Kyushu FG shall use the situation surrounding the notification to reinforce its

own management stance.

6. Management of correspondent banks

Kyushu FG shall regularly check up on a correspondent bank’s management stance to money laundering, etc. In the event that the

correspondent bank turns out to be a shell bank or an institution that is allowed to be used by a shell bank, Kyushu FG shall not en-

ter into or continue contracts with the correspondent bank in question.

7. Implementation of training, etc.

Kyushu FG shall conduct appropriate and ongoing training according to the roles of staff, and maintain and improve its expertise

and suitability as an organization as a whole by enhancing its understanding of issues relating to the prevention of money launder-

ing, etc., among all employees.

8. Inspections of compliance status

Kyushu FG shall regularly inspect its compliance status in terms of the prevention of money laundering, etc., and work to make on-

going improvements based on the results of these inspections.

19

web_010_0293401371909.indd 19 2019/11/19 9:16:31

Status of Risk Management System

The Group positions risk management as one of the most

crucial management issues, and the Company and compa-

nies within the Group are working together to strengthen risk

management.

The Group is working to build up a risk management system

by establishing the Compliance and Risk Management Division

as a division to assume overall control for risk management,

and convening the ALM Committee and Risk Management

Committee with the President as their chairperson so that the

status of credit risks, market risks, liquidity risks and operational

risks are reported and discussed.

Risk Management Basic Polic y

The Group positions risk management as one of the most crucial management issues to respond to the trust given to us by our cus-

tomers, shareholders, officers and employees and the regional society.

We are engaged in management that prioritizes the balance between the stable profitability and the soundness and appropriate-

ness of business operation, and in order to work towards establishing an unshakable management base, we work to have an accurate

understanding of all of the risks faced by the entire Group, and we suitably manage these risks in light of our management resources

(equity capital amount).

Integrated Risk ManagementIntegrated risk management is the integration of the various risks faced by the Group, the integrated assessment of the ripple effects

of risks within the Group as well as risks specific to the Group system that cannot be addressed by the individual companies within the

Group, and the management of these risks through comparing and contrasting with the Group’s management resources (equity capi-

tal amount).

To optimize risk and return for the Group, the credit risks, market risks, liquidity risks and operational risks occurring in Group op-

erations are quantitatively and qualitatively assessed and evaluated, and then integrated risk management takes place controlling the

risks within the range of the management resources (equity capital amount) by appropriately dealing with the risks, as necessary, from

in advance to after the fact.

Credit Risk ManagementCredit risk refers to the risk of the Group incurring losses through the depreciation or loss of value of an asset (including off-balance as-

sets) through the deterioration of financial condition of a party granted credit by the Group.

Credit risk management involves the timely and accurate assessment and evaluation of credit risk to the Group, and, through the

appropriate management of the risk, we are working to maintain soundness of our assets and realize stable profitability.

Cyber Security and Risk ManagementIn response to the various threats directly faced by the Group, including cybercrime, the Group is working on appropriate cyber secu-

rity and risk management in accordance with the scale and characteristics of the inherent risks of each group company.

Specifically, we have established a CSIRT (Computer Security Incident Response Team), consisting of the relevant departments, un-

der the supervision of the CISO (Chief Information Security Officer), and are working to upgrade our management system and prevent

the spread of any damage.

(Secretariat o�ce)Compliance and Risk Management Division


Board of Directors

ALM Committee Risk Management Committee

Credit risk managementMarket risk managementliquidity risk management, etc.

Operational risk management, etc.

The HigoBank Group

The KagoshimaBank Group


Risk Management

20

web_010_0293401371909.indd 20 2019/11/19 9:16:31

Market Risk ManagementMarket risk refers to the risk of the Group incurring loss through fluctuating values of assets and liabilities (including off-balance types)

as well as fluctuating profits from assets and liabilities, through various market risk factors, in interest rates, exchange rates, the stock

market, etc.

Market risk management involves the timely and accurate assessment and evaluation of market risk to the Group. We strive to se-

cure a profit through the active assumption of a certain level of market risk, and the appropriate management of such risks.

Liquidity Risk ManagementLiquidity risk refers to the risk of our Group incurring losses through difficulties in securing the necessary fund or having to procure

funding at interest rates significantly higher than usual, owing to a timing mismatch between the investment and fund procurement

or an unexpected outflow of fund (cash management risk). It also refers to the risk of our Group incurring losses through the inability

to perform transaction in the market owing to market confusion, etc., or being required to perform transactions at values significantly

more unfavorable than usual (market liquidity risk).

In liquidity risk management, the Group works on funding management that is stable, appropriate, and suitable to the structure of

the fund procurement and investment activities of the Group.

Operational Risk ManagementOperational risk refers to various risks, such as administrative risk, system risk, legal risk, personnel risk, tangible asset risk, reputational

risk, and information asset risk. Each risk is defined below.

1. Administrative risk

Administrative risk is the risk of the Group incurring losses through officers’ or employees’ negligence in accurately performing their

administrative duties, or an accident or wrongdoing caused by them during the course of their administrative operations.

2. System risk

System risk is the risk of the Group incurring losses through a system defect or misuse of a computer, such as a downed computer

system or malfunction, etc.

3. Legal risk

Legal risk is the risk of the Group incurring losses through a violation of the laws and regulations, etc., the conclusion of an inappro-

priate contract, or other legal cause.

4. Personnel risk

Personnel risk is the risk of the Group incurring losses through the outflow or loss of human resources, a reduction in employee

morale, inadequate human resource development, inappropriate work environment and work conditions, unfair and unjust human

resource management practices (problems with remuneration, allowances, dismissals, etc.), and discriminatory behavior (such as

sexual harassment).

5. Tangible asset risk

Tangible asset risk is the risk of the Group incurring losses through damage to tangible assets (movable property or real estate, such

as “land and buildings,” “facilities attached to building,” and “fixtures and equipment” that are owned or leased) due to natural disaster,

crime or defective asset management, etc.

6. Reputational risk

Reputational risk is the risk of the Group incurring losses through a loss in credit owing to a worsening reputation or the circulation

of rumors.

7. Information asset risk

Information asset risk is the risk of the Group incurring losses through the destruction, loss, alteration, leaking, theft, misuse, etc. of

information assets.

In operational risk management we are striving to minimize the various operational risks by assessing and evaluating the various op-

erational risks in a timely and accurate manner, and then appropriately dealing with the risks, as necessary, from in advance to after the

fact.

21

web_010_0293401371909.indd 21 2019/11/19 9:16:31

(Note 1) Directors Katsuaki Watanabe and Yuji Nemoto are Outside Directors as stipulated in Article 2-15 of the Companies Act.(Note 2) Corporate Auditors Kenichi Sekiguchi, Katsuro Tanaka, and Yuko Tashima are Outside Corporate Auditors as stipulated in Article 2-16 of the Companies Act.

Chairman and Representative Director

Sumihiro Matsuyama

(President, The Kagoshima Bank, Ltd.)

President and Representative Director

Yoshihisa Kasahara

(President of The Higo Bank, Ltd.)

Director and Executive Officer, General Manager of Business Strategy Division

Tadataka Tokunaga

Director and Senior Managing Executive Officer

Tsutomu Nakamura

(Director of Kyushu FG Securities, Inc.)

Director and Senior Managing Executive Officer

Tsuyoshi Mogami

(Director of Kyushu FG Securities, Inc.)

Director and Executive Officer, General Manager of Corporate Planning Division

Toru Hayashida

Director

Takahiro Kai

(Chairman of The Higo Bank, Ltd.)

Director

Motohiro Kamimura

(Chairman of The Kagoshima Bank, Ltd.)

Director (Outside)

Katsuaki Watanabe

(Corporate Auditor of Sumitomo Electric Industries, Ltd.)

Director (Outside)

Yuji Nemoto

(Professor of Toyo University)

Corporate Auditor (Full-time)

Yuichi Tanabe

(Corporate Auditor of The Higo Bank, Ltd.)

Corporate Auditor

Hirofumi Kaigakura

(Corporate Auditor of The Kagoshima Bank, Ltd.)

Corporate Auditor (Outside)

Kenichi Sekiguchi

(Senior Advisor of Meiji Yasuda Life Insurance Co.)


Yuko Tashima

(Partner Attorney of Sawayaka Law Office)


Katsuro Tanaka

(Senior Managing Partner of TMI Associates)

Executive Officer Executive Officer Executive Officer

Tsutomu Tajima Eichi Eto Norihisa Akatsuka

Executive Officer Executive Officer

Seiji Yamamoto Takeshi Jinnouchi

(As of October 1, 2019)

Management

22

web_010_0293401371909.indd 22 2019/11/19 9:16:38

Operating Results Regarding operating results for the current consolidated fiscal year, ordinary income increased 5,625 million yen from the previous

consolidated fiscal year to 170,322 million yen due to an increase in other operating income and other factors resulting from an in-

crease in gains on sales of securities including Japanese government bonds.

On the other hand, ordinary expenses increased 1,288 million yen from the previous consolidated fiscal year to 136,604 million yen

due to an increase in other operating expenses resulting from an increase in losses on sales of securities including Japanese govern-

ment bonds and an increase in other expenses, and other factors due to an increase in loss on impairment of securities.

As a result, ordinary profit increased 4,336 million yen from the previous consolidated fiscal year to 33,717 million yen. Meanwhile, net

income attributable to owners of parent increased 2,807 million yen from the previous consolidated fiscal year to 22,202 million yen.

Results by business segments are as follows.

a. Banking business

Ordinary income increased 3,706 million yen from the previous consolidated fiscal year to 140,878 million yen, and segment profit

increased 1,906 million yen from the previous consolidated fiscal year to 35,588 million yen.

b. Leasing business

Ordinary income decreased 1,413 million yen from the previous consolidated fiscal year to 30,510 million yen, and segment profit

increased 169 million yen from the previous consolidated fiscal year to 1,596 million yen.

c. Others

Ordinary income increased 1,503 million yen from the previous consolidated fiscal year to 9,284 million yen, and segment profit in-

creased 480 million yen from the previous consolidated fiscal year to 1,125 million yen.

Status of Cash Flows The status of cash flows for the current consolidated fiscal year and the primary reasons are as follows.

Net cash used in operating activities amounted to 32,408 million yen, despite an increase of 33,194 million yen from the previous

consolidated fiscal year, due to an increase in negotiable certificates of deposits and other factors.

Net cash provided by investing activities amounted to 325,890 million yen, up 72,178 million yen from the previous consolidated

fiscal year, due proceeds from redemption of securities and other factors.

Net cash used in financing activities amounted to 8,243 million yen, down 2,784 million yen from the previous consolidated fiscal

year due to payments for purchase of treasury stock and other factors.

As a result of the above, the balance of cash and cash equivalents at the end of the current consolidated fiscal year increased

285,249 million yen from the end of the previous consolidated fiscal year to 1,208,955 million yen.

Analysis of Financial Posit ion and Operating Results The following is an analysis of the financial position, operating results and cash flows for the current consolidated fiscal year.

The following is an analysis of the financial position and operating results for the current consolidated fiscal year.

1) Financial position

Regarding the financial position at the end of the current consolidated fiscal year, total assets increased 360,549 million yen from the

end of the previous consolidated fiscal year to 10,444,589 million yen, and total equity increased 18,769 million yen from the end of the

previous consolidated fiscal year to 652,317 million yen.

Regarding the balances of primary accounting items, the balance of deposits decreased 5,436 million yen from the end of the pre-

vious consolidated fiscal year to 8,567,557 million yen.

The balance of loans and bills discounted increased 406,939 million yen from the end of the previous consolidated fiscal year to

6,853,138 million yen.

The balance of securities decreased 291,296 million yen from the end of the previous consolidated fiscal year to 2,012,855 million yen.

2) Operating results

Regarding operating results for the current consolidated fiscal year, ordinary income increased 5,625 million yen from the previous

consolidated fiscal year to 170,322 million yen due to an increase in other operating income and other factors resulting from an in-

crease in gains on sales of securities including Japanese government bonds.

On the other hand, ordinary expenses increased 1,288 million yen from the previous consolidated fiscal year to 136,604 million yen

due to an increase in other operating expenses resulting from an increase in losses on sales of securities including Japanese govern-

ment bonds and an increase in other expenses, and other factors due to an increase in loss on impairment of securities.

As a result, ordinary profit increased 4,336 million yen from the previous consolidated fiscal year to 33,717 million yen. Meanwhile, net

income attributable to owners of parent increased 2,807 million yen from the previous consolidated fiscal year to 22,202 million yen.

Review of Financial Results

23

web_010_0293401371909.indd 23 2019/11/19 9:16:38

Millions of yenThousands of U.S.

dollars (Note 1)

2019 2018 2019ASSETS:Cash and due from banks (Notes 3 and 14) ¥ 1,211,471 ¥ 926,404 $ 10,915,136Call loans and bills bought (Note 14) 314 41,184 2,829Monetary claims purchased 10,557 10,505 95,116Trading assets (Notes 4 and 14) 1,183 3,426 10,658Money held in trust (Note 5) 18,621 17,955 167,771Securities (Notes 4, 8, and 14) 2,012,855 2,304,151 18,135,462Loans and bills discounted (Notes 6, 9, and 14) 6,853,138 6,446,199 61,745,544Foreign exchange assets 12,419 14,387 111,892Lease receivables and investment assets (Note 8) 52,606 51,338 473,970Other assets (Note 8) 191,314 190,602 1,723,704Fixed assets (Note 7) 98,306 92,647 885,719Intangible assets (Note 7) 9,317 9,746 83,944Asset for retirement benefits (Note 10) 5,857 6,152 52,770Deferred tax assets (Note 13) 972 1,091 8,757Customers’ liabilities for acceptances and guarantees 33,893 34,335 305,369Reserve for possible loan losses (Note 14) (68,241) (66,089) (614,839)

Total assets ¥ 10,444,589 ¥ 10,084,039 $ 94,103,874

LIABILITIES AND EQUITY:Liabilities:Deposits (Notes 8 and 14) ¥ 8,567,557 ¥ 8,572,993 $ 77,192,152Payables under repurchase agreements (Notes 8 and 14) 207,630 161,458 1,870,709Borrowing under securities lending transactions (Notes 8 and 14) 479,347 305,962 4,318,830Trading liabilities 5Borrowed money (Notes 8 and 14) 402,402 299,159 3,625,569Other liabilities 81,712 57,197 736,210Liability for retirement benefits (Note 10) 2,785 2,811 25,092Reserve for repayments for dormant deposits 2,267 2,215 20,425Reserve for contingent losses 484 489 4,360Reserve under special laws 0 0 0Deferred tax liabilities (Note 13) 10,114 9,687 91,125Deferred tax liabilities related to land revaluation (Note 2(g)) 4,076 4,173 36,724Acceptances and guarantees 33,893 34,335 305,369

Total liabilities 9,792,272 9,450,491 88,226,615

Equity (Note 11):Common stock

authorized, 1,000,000,000 shares;issued, 463,375,978 shares in 2019 and 2018 36,000 36,000 324,353

Capital surplus 198,362 194,112 1,787,206 Retained earnings 366,087 349,103 3,298,378 Treasury stock, at cost, 11,862,526 shares in 2019 and 8,861,730 shares in 2018 (5,270) (3,601) (47,481)Accumulated other comprehensive income:

Unrealized gains (losses) on available-for-sale securities (Note 4) 58,987 48,255 531,462 Deferred gains (losses) on derivatives under hedge accounting (7,915) (1,876) (71,312)Excess of land revaluation (Note 2(g)) 5,855 6,072 52,752 Defined retirement benefit plans (Note 10) (3,575) (3,254) (32,210)

Total accumulated other comprehensive income 53,350 49,196 480,673 Noncontrolling interests 3,788 8,737 34,129

Total equity 652,317 633,548 5,877,259Total liabilities and equity ¥ 10,444,589 ¥ 10,084,039 $ 94,103,874

See notes to consolidated financial statements.

24

Consolidated Financial StatementsKyushu Financial Group, Inc. and its Consolidated SubsidiariesConsolidated Balance Sheet March 31, 2019

011_0293401371909.indd 24 2019/10/03 19:23:44


dollars (Note 1)

2019 2018 2019Income:Interest income:

Interest on loans and discounts ¥ 70,254 ¥ 69,501 $ 632,975Interest and dividends on securities 27,446 25,888 247,283Other interest income 418 377 3,766

Fees and commissions income 21,661 21,370 195,161Trading income 827 69 7,451Other operating income 41,002 36,489 369,420Other income (Note 12) 8,825 10,999 79,511

Total income 170,437 164,697 1,535,606

Expenses:Interest expenses:

Interest on deposits 904 1,358 8,144Other interest expenses 6,856 6,009 61,771

Fees and commissions expenses 8,132 9,086 73,267Trading expenses 0Other operating expenses 36,658 35,199 330,282General and administrative expenses 75,645 76,564 681,547Provision for possible loan losses 3,809 4,573 34,318Losses on impairment of long-lived assets 92 63 828Other expenses 4,971 2,627 44,787

Total expenses 137,070 135,481 1,234,976Income before income taxes 33,366 29,216 300,621 Income taxes (Note 13):

Current 12,185 11,200 109,784 Deferred (1,484) (1,792) (13,370)Total income taxes 10,701 9,407 96,414

Net income 22,665 19,808 204,207Net income attributable to noncontrolling interests 462 412 4,162Net income attributable to owners of the parent ¥ 22,202 ¥ 19,395 $ 200,036

Per share of common stock (Note 2 (o)): Yen U.S. dollarsBasic net income ¥ 49.12 ¥ 42.67 $ 0.44Cash dividends applicable to the year 12.00 12.00 0.10


25

Kyushu Financial Group, Inc. and its Consolidated SubsidiariesConsolidated Statement of IncomeYear ended March 31, 2019

011_0293401371909.indd 25 2019/10/03 19:23:45


dollars (Note 1)

2019 2018 2019Net income ¥ 22,665 ¥ 19,808 $ 204,207Other comprehensive income (Note 16):

Unrealized gains (losses) on available-for-sale securities 10,708 2,381 96,477Deferred gains (losses) on derivatives under hedge accounting (6,039) 1,703 (54,410)Defined retirement benefit plans (321) 78 (2,892)

Total other comprehensive income 4,347 4,163 39,165Comprehensive income ¥ 27,012 ¥ 23,971 $ 243,373

Total comprehensive income attributable to:Owners of the parent ¥ 26,574 ¥ 23,495 $ 239,426Noncontrolling interests 438 476 3,946


26

Consolidated Financial Statements

Kyushu Financial Group, Inc. and its Consolidated SubsidiariesConsolidated Statement of Comprehensive IncomeYear ended March 31, 2019

011_0293401371909.indd 26 2019/10/03 19:23:45

Thousands Millions of yenOutstanding

number of shares of

common stockCommon

stockCapitalsurplus

Retainedearnings

Treasurystock

Balance at April 1, 2017 463,375 ¥ 36,000 ¥ 194,112 ¥ 335,146 ¥ (3,601)Cash dividends, ¥12.00 per share (5,454)Net income attributable to

owners of the parent 19,395Purchase of treasury stock (0)Disposal of treasury stock 0 0Reversal of excess of land

revaluation 15Net change in the year

Balance at March 31, 2018 463,375 36,000 194,112 349,103 (3,601)Purchase of shares of

consolidated subsidiaries 4,249Cash dividends, ¥12.00 per share (5,436)Net income attributable to

owners of the parent 22,202Purchase of treasury stock (1,668)Disposal of treasury stock (0) 0Reversal of excess of land


Balance at March 31, 2019 463,375 ¥ 36,000 ¥ 198,362 ¥ 366,087 ¥ (5,270)

Millions of yenAccumulated other comprehensive income

Unrealized gains (losses) on

available-for-sale securities

Deferred gains (losses) on derivatives

under hedge accounting

Excess of land revaluation

Defined retirement

benefit plans

Total accumulated

other comprehensive

incomeNoncontrolling

interestsTotal

equity

Balance at April 1, 2017 ¥ 45,937 ¥ (3,580) ¥ 6,088 ¥ (3,332) ¥ 45,112 ¥ 8,265 ¥ 615,035Cash dividends, ¥12.00 per share (5,454)Net income attributable to

owners of the parent 19,395Purchase of treasury stock (0)Disposal of treasury stock 0Reversal of excess of land

revaluation 15Net change in the year 2,317 1,703 (15) 78 4,083 472 4,556

Balance at March 31, 2018 48,255 (1,876) 6,072 (3,254) 49,196 8,737 633,548Purchase of shares of

consolidated subsidiaries 4,249Cash dividends, ¥12.00 per share (5,436)Net income attributable to

owners of the parent 22,202Purchase of treasury stock (1,668)Disposal of treasury stock 0Reversal of excess of land

revaluation 217Net change in the year 10,731 (6,039) (217) (321) 4,154 (4,949) (795)

Balance at March 31, 2019 ¥ 58,987 ¥ (7,915) ¥ 5,855 ¥ (3,575) ¥ 53,350 ¥ 3,788 ¥ 652,317


27

Kyushu Financial Group, Inc. and its Consolidated SubsidiariesConsolidated Statement of Changes in EquityYear ended March 31, 2019

011_0293401371909.indd 27 2019/10/03 19:23:45

Thousands of U.S. dollars (Note 1)Common

stockCapitalsurplus

Retained earnings

Treasurystock

Balance at March 31, 2018 $ 324,353 $ 1,748,914 $ 3,145,355 $ (32,444)Purchase of shares of

consolidated subsidiaries 38,282Cash dividends, $0.10 per

share (48,977)Net income attributable to

owners of the parent 200,036 Purchase of treasury stock (15,028)Disposal of treasury stock (0) 0Reversal of excess of land

revaluation 1,955Net change in the year

Balance at March 31, 2019 $ 324,353 $ 1,787,206 $ 3,298,378 $ (47,481)

Thousands of U.S. dollars (Note 1)Accumulated other comprehensive income






Defined retirement

benefit plans

Total accumulated

other comprehensive

incomeNoncontrolling

interestsTotal

equity

Balance at March 31, 2018 $ 434,768 $ (16,902) $ 54,707 $ (29,317) $ 443,247 $ 78,718 $ 5,708,153Purchase of shares of

consolidated subsidiaries 38,282Cash dividends, $0.10 per

share (48,977)Net income attributable to

owners of the parent 200,036Purchase of treasury stock (15,028)Disposal of treasury stock 0Reversal of excess of land

revaluation 1,955Net change in the year 96,684 (54,410) (1,955) (2,892) 37,426 (44,589) (7,162)

Balance at March 31, 2019 $ 531,462 $ (71,312) $ 52,752 $ (32,210) $ 480,673 $ 34,129 $ 5,877,259


28

Consolidated Financial Statements

Kyushu Financial Group, Inc. and its Consolidated SubsidiariesConsolidated Statement of Changes in EquityYear ended March 31, 2019

011_0293401371909.indd 28 2019/10/03 19:23:45


dollars (Note 1)

2019 2018 2019Operating activities:Income before income taxes ¥ 33,366 ¥ 29,216 $ 300,621Adjustments for:

Income taxes paid (10,040) (11,530) (90,458)Depreciation and amortization 7,212 7,679 64,978 Losses on impairment of long-lived assets 92 63 828 Increase (decrease) in reserve for possible loan losses 2,151 (583) 19,380 (Increase) decrease in asset for retirement benefits 294 536 2,648 Increase (decrease) in liability for retirement benefits (25) (7,399) (225)Increase (decrease) in reserve for repayments for dormant deposits 51 498 459 Increase (decrease) in reserve for contingent losses (4) (2) (36)Interest and dividend income (98,120) (95,768) (884,043)Interest expenses 7,760 7,367 69,916 (Gains) losses on securities (4,300) (1,152) (38,742)(Gains) losses on money held in trust 164 (268) 1,477 Net (increase) decrease in trading assets 2,243 (1,421) 20,209 Net (increase) decrease in loans and bills discounted (406,939) (375,736) (3,666,447)Net increase (decrease) in deposits (5,437) 290,527 (48,986)Net increase (decrease) in borrowed money (excluding subordinated

borrowings) 103,242 20,273 930,191 Net (increase) decrease in due from banks (excluding deposits paid

to the Bank of Japan) 183 (792) 1,648Net (increase) decrease in call loans and others 40,816 (40,868) 367,744Net increase (decrease) in call money and others (90,000)Net increase (decrease) in payables under repurchase agreements 46,172 143,932 416,001 Net increase (decrease) in borrowing under securities lending

transactions 173,384 72,071 1,562,158 Net (increase) decrease in lease receivables and investment assets (1,268) (2,126) (11,424)Interest received 100,368 100,303 904,297 Interest paid (7,718) (7,426) (69,537)Other (16,061) (102,996) (144,706)

Total adjustments (65,774) (94,818) (592,611)Net cash used in operating activities (32,408) (65,602) (291,990)

Investing activities:Payments for purchase of securities (1,744,197) (824,230) (15,714,902)Proceeds from sales of securities 482,494 472,857 4,347,184 Proceeds from redemption of securities 1,600,974 614,197 14,424,488 Increase in money held in trust (14,239) (2,296) (128,290)Decrease in money held in trust 13,303 3,083 119,857 Payments for purchase of fixed assets (10,196) (6,563) (91,864)Proceeds from sales of fixed assets 566 35 5,099 Payments for purchase of intangible assets (2,814) (3,370) (25,353)Net cash provided by investing activities 325,890 253,711 2,936,210

Financing activities:Cash dividends paid (5,436) (5,454) (48,977)Cash dividends paid to noncontrolling interests (4) (4) (36)Payments for purchases of treasury stock (1,668) (0) (15,028)Proceeds from sales of treasury stock 0 0 0 Payments for purchases of shares of subsidiaries that do not result in

change in scope of consolidation (1,134) (10,217)Net cash used in financing activities (8,243) (5,458) (74,267)Foreign currency translation adjustments on cash and cash equivalents 10 1 90Net increase (decrease) in cash and cash equivalents 285,249 182,651 2,570,042 Cash and cash equivalents at beginning of year 923,705 741,053 8,322,416 Cash and cash equivalents at end of year (Note 3) ¥ 1,208,955 ¥ 923,705 $ 10,892,467


29

Kyushu Financial Group, Inc. and its Consolidated SubsidiariesConsolidated Statement of Cash FlowsYear ended March 31, 2019

011_0293401371909.indd 29 2019/10/03 19:23:45

1. Basis of Presenting Consolidated Financial Statements

The accompanying consolidated financial statements of the Kyushu Financial Group, Inc. (the “Company”) and its consolidated subsid-

iaries (collectively, the “Group”) have been prepared in accordance with the provisions set forth in the Japanese Financial Instruments

and Exchange Act, its related accounting regulations and the Enforcement Regulation for the Banking Law of Japan (the “Banking

Law”), and in accordance with accounting principles generally accepted in Japan, which are different in certain respects as to applica-

tion and disclosure requirements of International Financial Reporting Standards.

Amounts of less than ¥1 million and $1 thousand have been omitted. As a result, the totals shown in the consolidated financial

statements and notes thereto do not necessarily agree with the sum of the individual account balances.

The consolidated financial statements are stated in Japanese yen, the currency of the country in which the Company is incor-

porated and operates. The translations of Japanese yen amounts into U.S. dollar amounts are included solely for the convenience of

readers outside Japan and have been made at the rate of ¥110.99 to $1.00, the approximate rate of exchange at March 31, 2019. Such

translations should not be construed as representations that the Japanese yen amounts could be converted into U.S. dollars at that or

any other rate.

2 . Summar y of Signif icant Accounting Policies

a. ConsolidationThe accompanying consolidated financial statements include the accounts of the Company and its 17 consolidated subsidiaries as of

March 31, 2019 and 2018.

Under the control or influence concept, those companies in which the Company, directly or indirectly, is able to exercise control

over operations are fully consolidated.

Investments in remaining unconsolidated subsidiaries and affiliated companies are stated at cost. If the equity method of account-

ing had been applied to the investment in these companies, the effect on the accompanying consolidated financial statements would

not be material.

All significant intercompany balances and transactions have been eliminated in consolidation. All material unrealized profit includ-

ed in assets resulting from transactions within the Group is eliminated.

b. Business combinationsBusiness combinations are accounted for using the purchase method. Acquisition-related costs, such as advisory fees or professional

fees, are accounted for as expenses in the periods in which the costs are incurred. If the initial accounting for a business combination is

incomplete by the end of the reporting period in which the business combination occurs, an acquirer shall report in its financial state-

ments provisional amounts for the items for which the accounting is incomplete. During the measurement period, which shall not

exceed one year from the acquisition, the acquirer shall retrospectively adjust the provisional amounts recognized at the acquisition

date to reflect new information obtained about facts and circumstances that existed as of the acquisition date and that would have af-

fected the measurement of the amounts recognized as of that date. Such adjustments shall be recognized as if the accounting for the

business combination had been completed at the acquisition date. The acquirer recognizes any bargain purchase gain in profit or loss

immediately on the acquisition date after reassessing and confirming that all of the assets acquired and all of the liabilities assumed

have been identified after a review of the procedures used in the purchase price allocation. A parent’s ownership interest in a subsid-

iary might change if the parent purchases or sells ownership interests in its subsidiary. The carrying amount of noncontrolling interests

is adjusted to reflect the change in the parent’s ownership interest in its subsidiary while the parent retains its controlling interest in its

subsidiary. Any difference between the fair value of the consideration received or paid and the amount by which the noncontrolling

interests are adjusted is accounted for as capital surplus as long as the parent retains control over its subsidiary.

30

Notes to Consolidated Financial StatementsKyushu Financial Group, Inc. and its Consolidated SubsidiariesNotes to Consolidated Financial StatementsYear ended March 31, 2019

011_0293401371909.indd 30 2019/10/03 19:23:45

c. Cash and cash equivalentsCash and cash equivalents in the consolidated statement of cash flows are composed of cash on hand and due from the Bank of

Japan.

d. Foreign currency translationThe Group maintains its accounting records in Japanese yen. Foreign currency assets and liabilities are translated into Japanese yen at

the exchange rates prevailing on the consolidated balance sheet date.

e. Trading assets/liabilities and trading income/expensesTrading transactions of consolidated subsidiaries, which are engaged in banking business and financial instruments business intended

to take advantage of short-term fluctuations and arbitrage opportunities in interest rates, currency exchange rates, market prices of se-

curities, and related indices, are recognized on a trade-date basis and recorded in trading assets or trading liabilities in the consolidated

balance sheet. Income or expenses generated on the relevant trading transactions are recorded in trading income or trading expenses

in the consolidated statement of income.

Securities and other monetary claims held for trading purposes are stated at fair value at the consolidated balance sheet date.

Derivative financial products, such as swaps, forward contracts, and option transactions, are stated at fair value, assuming that such

transactions were terminated and settled at the consolidated balance sheet date.

Trading income and trading expenses include the interest received and interest paid during the fiscal year; the gains or losses

resulting from any change in the value of securities and other monetary claims between the beginning and the end of the fiscal year

and the gains or losses resulting from any change in the value of financial derivatives between the beginning and the end of the fiscal

year, assuming they were settled at the end of the fiscal year.

f. Financial instrumentsi) Securities

Held-to-maturity debt securities are stated at amortized cost as determined using the moving-average method. Available-for-sale se-

curities, with market quotations, are stated at the market prices prevailing on the consolidated balance sheet date. Cost of sales of such

securities is determined using the moving-average method. Net unrealized gains or losses on these securities, net of taxes, are report-

ed in a separate component of equity. Available-for-sale securities, the market quotations of which are extremely difficult to obtain, are

stated at cost as determined using the moving-average method. For other-than-temporary declines in fair value, securities are reduced

to net realizable value by a charge to income. Securities included in money held in trusts managed separately, the primary objective of

which is to invest, are stated at market prices. In addition, investments in unconsolidated subsidiaries and affiliated companies that are

not accounted for by the equity method are stated at cost as determined using the moving-average method.

ii) Derivatives

Derivatives other than those designated as “Trading assets and trading liabilities” (see (e) Trading assets/liabilities and trading income/

expenses) are stated at fair value, with changes in fair value included in net profit or loss for the period in which they arise, except for

derivatives that are designated as “hedging instruments” (see iii) Hedge accounting below).

iii) Hedge accounting

a) Hedge of interest rate risks

The banking consolidated subsidiaries apply deferral hedge accounting to hedges of interest rate risk associated with financial assets

and liabilities in accordance with the Industry Audit Committee Report No. 24, “Accounting and Auditing Treatments on the Application

of Accounting Standards for Financial Instruments in the Banking Industry,” issued on February 13, 2002, by the Japanese Institute of

Certified Public Accountants (JICPA). Under this rule, the effectiveness of cash flow hedges and hedges for the purpose of reducing

interest rate fluctuation risk of loans and debt securities is assessed based on the correlation between a base interest rate index of the

hedged items and that of the hedging instruments. Specific matching criteria are not measured at fair value, but the net payments or

receipts under the swap agreements are recognized and included in interest expenses or income.

31

011_0293401371909.indd 31 2019/10/03 19:23:45

b) Hedge of foreign currency exchange risks

The banking consolidated subsidiaries apply the deferral method of hedge accounting for hedges of the risks arising from financial

assets and liabilities due to the fluctuation of foreign exchange rates, which is described in “Treatment for Accounting and Auditing of

Application of Accounting Standard for Foreign Currency Transactions in Banking Industry,” issued on July 29, 2002 (the JICPA Industry

Audit Committee Report No. 25). The banking consolidated subsidiaries assess the effectiveness of hedging instruments executed for

reducing the risk of changes in currency exchange rates with currency swaps or foreign exchange swaps by verifying that there ex-

ist foreign currency positions of the hedging instruments corresponding to the foreign currency monetary assets and liabilities to be

hedged.

g. Fixed assets and intangible assetsi) Fixed assets and intangible assets are stated at cost, less accumulated depreciation

Depreciation of fixed assets owned by the Company and the banking consolidated subsidiaries is computed using the declining-

balance method, while the straight-line method is applied to buildings (excluding facilities attached to buildings) acquired on or after

April 1, 1998, and facilities attached to buildings and structures acquired on or after April 1, 2016. The range of useful lives is principally

from 19 to 50 years for buildings and from 2 to 20 years for other fixed assets. Tangible fixed assets of other consolidated subsidiaries

are principally depreciated using the declining-balance method over the estimated useful lives of the assets.

Amortization of intangible assets owned by the Group is computed using the straight-line method over the estimated useful lives

of the assets. Cost of computer software obtained for internal use is amortized over the estimated useful lives of five years.

ii) Land revaluation

Under the “Law of Land Revaluation,” the Group elected a one-time revaluation of land for use by Higo Bank to a value based on real

estate appraisal information as of March 31, 1999.

The resulting excess of land revaluation represents unrealized appreciation of land and is stated, net of income taxes, as a compo-

nent of equity. There was no effect on the consolidated statement of income. Continuous readjustment is not permitted, unless the

land value subsequently declines significantly such that the amount of the decline in value should be removed from the excess of land

revaluation account and related deferred tax liabilities.

The carrying amount of the land after the above one-time revaluation exceeded the fair value by ¥9,610 million ($86,584 thousand)

and ¥11,015 million as of March 31, 2019 and 2018, respectively.

h. Long-lived assetsThe Group reviews its long-lived assets for impairment whenever events or changes in circumstance indicate the carrying amount of

an asset or asset group may not be recoverable. An impairment loss would be recognized if the carrying amount of an asset or asset

group exceeds the sum of the undiscounted future cash flows expected to result from the continued use and eventual disposition of

the asset or asset group. The impairment loss would be measured as the amount by which the carrying amount of the asset exceeds

its recoverable amount, which is the higher of the discounted cash flows from the continued use and eventual disposition of the asset

or the net selling price at disposition.

i. Reserve for possible loan lossesReserve for possible loan losses of the banking consolidated subsidiaries is provided to cover future credit losses in accordance with

the internal rules for self-assessment of asset quality.

Reserve for possible loan losses is provided based on historical loan-loss ratio computed for a certain period in the past for claims

to normal borrowers and claims to borrowers who need attention as stipulated by the “Practical Guidelines for Audits of the Self-

Assessment of Assets of Financial Institutions Including Banks, Write-Down and Allowance for Doubtful Accounts,” issued on July 4,

2012 (the JICPA Ad Hoc Committee for Audit of Banks, etc., Report No. 4).

For claims to large-lot borrowers who need attention, whose loans are classified as restructured loans, and whose future cash flows

of principal and interest are reasonably estimated, the reserve is provided for as the difference between the present value of expected

future cash flows discounted at the contracted interest rate and the carrying amount of the claims. In cases where it is difficult to rea-

sonably estimate future cash flows, the reserve is provided based on the estimated credit losses within the remaining loan terms calcu-

lated by the banks.

32

Notes to Consolidated Financial Statements

011_0293401371909.indd 32 2019/10/03 19:23:45

For claims to borrowers who are possibly bankrupt, the reserve is provided for loan losses at the amount considered necessary

based on overall solvency assessment of the borrowers after deducting the amount expected to be collected through the disposal of

collateral or execution of guarantees.

For claims to borrowers who are legally bankrupt and virtually bankrupt, the reserve is provided based on the net of amounts ex-

ceeding the expected collectible amounts through the disposal of collateral or execution of guarantees.

All claims are assessed by the operating divisions of the banking consolidated subsidiaries in accordance with the internal rules for

the self-assessment of asset quality. The asset examination division, which is independent from the operating divisions, conducts au-

dits of these assessments.

Regarding other consolidated subsidiaries, a general reserve for loan losses is provided in the amount deemed necessary based on

historical loan-loss ratio, and the reserve for specific claims is provided in the amount deemed uncollectible based on the respective

assessment.

j. Retirement and pension plansThe banking consolidated subsidiaries have cash balance-type pension plans, defined benefit corporate pension plans (fund type), and

lump-sum retirement benefit plans, which became fund type plans after the establishment of the retirement benefit trust. The amount

of liability for employees’ retirement benefit is determined based on the projected benefit obligations and the pension assets on the

consolidated balance sheet date. The projected benefit obligations are attributed to periods on a benefit formula basis.

Past service cost is amortized using the straight-line method over 10 years. Net actuarial gain or loss is amortized using the straight-

line method or declining-balance method over 10 years commencing from the next fiscal year of occurrence.

Other consolidated subsidiaries adopt the simplified method in determining liabilities for retirement benefits and net periodic

benefit costs under which liability for retirement benefits is computed based on projected benefit obligations.

k. Reserve for contingent lossesUnder the joint responsibility system with governmental credit guarantee organizations, reserve for contingent losses is provided for

possible future payments to the organizations in an amount deemed necessary based on estimated losses in the future.

l. Reserve for repayments for dormant depositsReserve for repayments for dormant deposits is provided for possible losses on future withdrawal of inactive deposits that had been

recognized as income.

m. Reserve under special lawsReserve under special laws is a reserve for liability for financial instruments transactions of consolidated subsidiary and is recorded as

determined in accordance with the provisions of Article 4 6-5 of the Financial Instruments and Exchange Act and Article 1 7 5 of the

Cabinet Office Ordinance on Financial Instruments Business in order to provide for losses arising from security-related accidents.

n. LeasesRevenues and cost of revenues of finance lease transactions are recognized and included in other operating income and other operat-

ing expenses when lease payments are made.

o. Per share informationThe computation of basic net income per share is based on the weighted-average number of shares of common stock outstanding

during the year. The weighted-average number of common shares used in the computation was 451,924 thousand shares and 454,514

thousand shares for the years ended March 31, 2019 and 2018, respectively.

Diluted net income per share is not disclosed for the years ended March 31, 2019 and 2018, because there are no potentially dilu-

tive common shares.

Cash dividends per share presented in the accompanying consolidated statement of income are dividends applicable to the re-

spective years, including dividends to be paid after the end of the year.

33

011_0293401371909.indd 33 2019/10/03 19:23:45

p. Income taxesThe provision for income taxes is computed based on the pretax income included in the consolidated statement of income. The asset

and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary dif-

ferences between the carrying amounts and the tax bases of assets and liabilities. Deferred taxes are measured by applying currently

enacted tax laws to the temporary differences.

q. Appropriations of retained earningsAppropriations of retained earnings at each year-end are reflected in the consolidated financial statements for the following year upon

shareholders’ approval.

3. Cash and Cash Equivalents

A reconciliation of the cash and cash equivalent balances in the consolidated statement of cash flows and the account balances in the

consolidated balance sheet was as follows:

Millions of yenThousands of

U.S. dollars

2019 2018 2019Cash and due from banks ¥ 1,211,471 ¥ 926,404 $ 10,915,136Other due from banks (2,515) (2,699) (22,659)Cash and cash equivalents ¥ 1,208,955 ¥ 923,705 $ 10,892,467

4. Securities

The costs and aggregate fair values of securities at March 31, 2019 and 2018, were as shown in the table below. The amounts shown in

the following tables include trading securities classified as “trading assets” in addition to “securities” stated in the consolidated balance

sheet.

Millions of yen2019

Fair value CostNet unrealizedgains (losses)

Securities classified as:Trading ¥ 1,183Available-for-sale:

Equity securities 136,393 ¥ 107,436 ¥ 28,957Debt securities 1,246,106 1,222,564 23,543Other 600,695 569,954 30,740

Held-to-maturity:Debt securities 14,830 14,716 114

Millions of yen2018


Securities classified as:Trading ¥ 3, 420Available-for-sale:

Equity securities 149,418 ¥ 105,816 ¥ 43,603Debt securities 1,619,144 1,598,544 20,600Other 508,852 505,230 3,622

Held-to-maturity:Debt securities 14,812 14,763 48

34


011_0293401371909.indd 34 2019/10/03 19:23:45

Thousands of U.S. dollars2019


Securities classified as:Trading $ 10,658Available-for-sale:

Equity securities 1,228,876 $ 967,979 $ 260,897Debt securities 11,227,191 11,015,082 212,118 Other 5,412,154 5,135,183 276,961

Held-to-maturity:Debt securities 133,615 132,588 1,027

Securities included equity investments in unconsolidated subsidiaries and affiliated companies that amounted to ¥3,641 million ($32,804

thousand) and ¥3,458 million as of March 31, 2019 and 2018, respectively.

Securities lending based on noncollateralized special contracts were included in debt securities and amounted to ¥65,289 million ($588,242

thousand) and ¥58,005 million as of March 31, 2019 and 2018, respectively.

Guarantee obligations for private placement bonds, out of bonds included in securities, amounted to ¥20,825 million ($187,629 thousand)

and ¥20,135 million as of March 31, 2019 and 2018, respectively.

Unlisted equity securities and other securities without readily available fair values, amounting to ¥14,941 million ($134,615 thousand) and

¥11,971 million as of March 31, 2019 and 2018, respectively, were not included in the table above.

The information of held-to-maturity securities that were sold for the years ended March 31, 2019 and 2018, was as follows:

Millions of yen2019

Cost of sales ProceedsRealized gains

(losses)Held-to-maturity securities:

Japanese government bondsMunicipal government bondsCorporate bonds ¥ 150 ¥ 151 ¥ 1Other

Total ¥ 150 ¥ 151 ¥ 1

Millions of yen2018



Japanese government bondsMunicipal government bondsCorporate bonds ¥ 220 ¥ 220 ¥ 0Other

Total ¥ 220 ¥ 220 ¥ 0

Thousands of U.S. dollars 2019



Japanese government bondsMunicipal government bondsCorporate bonds $ 1,351 $ 1,360 $ 9Other

Total $ 1,351 $ 1,360 $ 9

Note: (Reason for sales) Due to retirement of bonds through purchase

35

011_0293401371909.indd 35 2019/10/03 19:23:45

The information of available-for-sale securities that were sold for the years ended March 31, 2019 and 2018, was as follows:

Millions of yen2019

Proceeds Realized gains Realized lossesAvailable-for-sale:

Equity securities ¥ 36,635 ¥ 5,874 ¥ 1,185Debt securities 143,796 5,330 2,780Other 255,477 3,393 5,588

Total ¥ 435,909 ¥ 14,598 ¥ 9,554

Millions of yen2018


Equity securities ¥ 25,655 ¥ 5,342 ¥ 253Debt securities 212,318 2,137 742Other 224,862 1,070 6,463

Total ¥ 462,837 ¥ 8,549 ¥ 7,459



Equity securities $ 330,074 $ 52,923 $ 10,676Debt securities 1,295,576 48,022 25,047 Other 2,301,801 30,570 50,346

Total $ 3,927,461 $ 131,525 $ 86,079

Securities other than trading securities (excluding those securities whose fair value cannot be reliably determined) whose fair value sig-

nificantly declined compared with the acquisition cost and was considered not to recover to the acquisition cost were written down to

the respective fair value, which was recorded as the carrying amount in the consolidated balance sheet.

Impairment loss on equity securities for the years ended March 31, 2019 and 2018, was ¥747 million ($6,730 thousand) and nil,

respectively.

Impairment loss was recorded for all securities whose fair value declined by 50% or more of the acquisition cost. For securities

whose fair value declined by more than 30%, but less than 50%, the necessity of recording impairment loss was determined based on

the transition of fair values over a certain period in the past and the credit risk of the issuing company.

Net unrealized gains on available-for-sale securities for the years ended March 31, 2019 and 2018, consisted of the following:


U.S. dollars

2019 2018 2019Valuation differences:

Available-for-sale securities ¥ 83,242 ¥ 67,824 $ 749,995Deferred tax liabilities (24,071) (19,361) (216,875)Noncontrolling interests (183) (207) (1,648)

Unrealized gains on available-for-sale securities ¥ 58,987 ¥ 48,255 $ 531,462

36


011_0293401371909.indd 36 2019/10/03 19:23:45

5. Money Held in Trust

The carrying amounts and unrealized gains (losses) of money held in trust as of March 31, 2019 and 2018, were as follows:

Money held in trust held for trading


U.S. dollars

2019 2018 2019Carrying amounts ¥ 15,851 ¥ 17,815 $ 142,814Unrealized gains (losses) credited to income (6) (193) (54)

Money held in trust other than those held for trading purposes or held to maturity as of March 31, 2019 and 2018 were as follows:

Millions of yen2019

Carrying amount CostNet unrealizedgains (losses)

Other money held in trust ¥ 2,770 ¥ 2,770

Millions of yen2018


Other money held in trust ¥ 140 ¥ 140

Thousands of U.S. dollars 2019


Other money held in trust $ 24,957 $ 24,957

Note: Net unrealized gains (losses) were nil because the carrying amounts of other money held in trust did not exceed the cost, nor the cost exceeded the carrying amounts.

6. Loans and Bil ls Discounted

Loans and bills discounted as of March 31, 2019 and 2018, included the following:


U.S. dollars

2019 2018 2019Bankruptcy loans ¥ 3,098 ¥ 2,473 $ 27,912Past-due loans 81,465 83,980 733,985 Loans past due for three months or more 179 198 1,612 Restructured loans 46,756 53,742 421,263Total ¥ 131,500 ¥ 140,394 $ 1,184,791

37

011_0293401371909.indd 37 2019/10/03 19:23:45

Bankruptcy loans represent nonaccrual loans to borrowers who are legally bankrupt as defined in Article 96-1-3 and 4 of the Japanese

Tax Law Enforcement Regulation (Article 97 of 1965 Cabinet Order).

Past-due loans represent nonaccrual loans other than bankruptcy loans and loans for which payments of interest are deferred in

order to assist or facilitate the restructuring of borrowers in financial difficulties.

Loans past due for three months or more include loans for which payments of principal or interest are delinquent by three months

or more, as calculated from the day following the contracted payment date, but do not include bankruptcy loans or past-due loans.

Restructured loans represent loans on which contracts were amended in favor of borrowers (e.g., reduction of, or exemption from,

stated interest, deferral of interest payments, extension of maturity dates, and renunciation of claims) in order to assist or facilitate the

restructuring of borrowers in financial difficulties, but do not include bankruptcy loans, past-due loans, or loans past due for three

months.

Loans include discounted bills amounting to ¥21,877 million ($197,107 thousand) and ¥23,040 million as of March 31, 2019 and

2018, respectively. The Group is entitled, without limitation, to sell or pledge these discounted bills.

The carrying amounts of loan participations, which were accounted for as loans to original debtors in accordance with “Accounting

and Presentation of Loan Participation” issued on November 28, 2014 (the JICPA Accounting System Committee Report No. 3), were

¥2,985 million ($26,894 thousand) and ¥1,811 million as of March 31, 2019 and 2018, respectively.

7. Fixed A ssets and Intangible A ssets

Fixed assets as of March 31, 2019 and 2018, consisted of the following:


U.S. dollars

2019 2018 2019Buildings ¥ 27,728 ¥ 28,780 $ 249,824Land 50,494 50,225 454,941 Construction in progress 9,268 2,475 83,503 Other 10,815 11,166 97,441Total ¥ 98,306 ¥ 92,647 $ 885,719

Accumulated depreciation as of March 31, 2019 and 2018, amounted to ¥72,947 million ($657,239 thousand) and ¥72,044 million,

respectively.

Deferred gains for tax purposes as of March 31, 2019 and 2018, amounted to ¥3,517 million ($31,687 thousand) and ¥3,424 million,

respectively.

Intangible assets as of March 31, 2019 and 2018, consisted of the following:


U.S. dollars

2019 2018 2019Software ¥ 9,002 ¥ 9,430 $ 81,106Other 315 315 2,838Total ¥ 9,317 ¥ 9,746 $ 83,944

38


011_0293401371909.indd 38 2019/10/03 19:23:45

8. A ssets Pledged

Assets pledged as collateral as of March 31, 2019 and 2018, were as follows:


U.S. dollars

2019 2018 2019Securities ¥ 1,226,049 ¥ 1,001,423 $ 11,046,481Lease receivables and investment assets 1,815 1,708 16,352Other 4Total ¥ 1,227,864 ¥ 1,003,137 $ 11,062,834

Liabilities related to the above assets pledged as of March 31, 2019 and 2018, were as follows:


U.S. dollars

2019 2018 2019Deposits ¥ 46,433 ¥ 32,908 $ 418,353Payables under repurchase agreements 207,630 158,393 1,870,709 Borrowing under securities-lending transactions 479,347 301,903 4,318,830 Borrowed money 387,693 284,658 3,493,044

In addition, securities amounting to nil and ¥13,854 million and other assets amounting to ¥115,696 million ($1,042,400 thousand)

and ¥108,096 million were pledged as collateral for settlement of exchange and other transactions with designated financial institu-

tions, etc., as of March 31, 2019 and 2018, respectively.

Guarantee deposits amounting to ¥715 million ($6,442 thousand) and ¥703 million, cash collateral for financial instruments amounting to

¥9,679 million ($87,206 thousand) and ¥4,646 million, and deposits to a central counterparty of ¥12,635 million ($113,839 thousand)

and ¥13,201 million were included in other assets as of March 31, 2019 and 2018, respectively.

9. Commitment Line Agreements Related to Overdraf ts and Loans

Commitment line agreements relating to overdrafts and loans represent agreements to allow customers to extend overdrafts or loans

up to agreed amounts at the customer’s request as long as no violation against the conditions of the agreements exists.

Unused commitment lines under such agreements as of March 31, 2019 and 2018, were as follows:


U.S. dollars

2019 2018 2019Original maturity is within one year or the Group can cancel at any

time without any penalty ¥ 1,480,118 ¥ 1,500,599 $ 13,335,597Other 42,943 47,326 386,908Total ¥ 1,523,061 ¥ 1,547,925 $ 13,722,506

The amount of unexercised commitment lines does not necessarily affect the future cash flows of the Group because most of such

agreements are terminated without being exercised. Most of these agreements have provisions, which stipulate that the Group may

deny extending loans or decrease the commitment line when there are certain changes in financial markets, certain issues in securing

loans, and other reasons. The consolidated subsidiaries request collateral in the form of premises or securities as deemed necessary

upon providing such commitments. In addition, the Group monitors the financial conditions of customers in accordance with its inter-

nal rules on a regular basis and takes necessary measures, including revisiting the terms of commitments and other means to prevent

credit losses.

39

011_0293401371909.indd 39 2019/10/03 19:23:45

10. Retirement and Pension Plans

The banking consolidated subsidiaries have cash balance-type pension plans, defined benefit corporate pension plans (fund type), and

lump-sum retirement benefit plans, which became fund type plans after the establishment of the retirement benefit trust. Under the

cash balance-type plans in the corporate pension plans, a pension or lump-sum money will be paid on the basis of length of service,

professional qualification, and age. In addition, under the unfunded retirement benefit plans, lump-sum money will be paid on the

basis of length of service at certain professional qualification and other factors. Some of the other consolidated subsidiaries have retire-

ment benefit plans and adopt the simplified method in determining liabilities for retirement benefits. Extra retirement benefit may be

paid upon the retirement of employees of the Group. Retirement benefit trusts were set up on the corporate pension fund plans and

lump-sum retirement benefit plans for certain banking consolidated subsidiaries.

(a) The changes in defined benefit obligation for the years ended March 31, 2019 and 2018, were as follows:


U.S. dollars

2019 2018 2019Balance at beginning of year ¥ 63,320 ¥ 63,209 $ 570,501 Current service cost 1,862 1,869 16,776 Interest cost 248 297 2,234 Actuarial (gains) losses 687 1,528 6,189 Benefits paid (3,410) (3,585) (30,723)Balance at end of year ¥ 62,709 ¥ 63,320 $ 564,996

(Note) Consolidated subsidiaries adopted the simplified method in calculating defined benefit obligations, and the retirement benefit costs were recognized as “Current service cost.” Extraordinary additional retirement benefits were not included in the table above.

(b) The changes in plan assets for the years ended March 31, 2019 and 2018, were as follows:


U.S. dollars

2019 2018 2019Balance at beginning of year ¥ 66,661 ¥ 59,687 $ 600,603 Expected return on plan assets 1,956 1,953 17,623 Actuarial gains (losses) (983) 291 (8,856) Contributions from the employer 1,247 1,264 11,235 Benefits paid (2,806) (2,811) (25,281)Amount of contribution to retirement benefit trust 7,000 Partial return of retirement benefit trusts (294) (724) (2,648)Balance at end of year ¥ 65,781 ¥ 66,661 $ 592,675

(c) Reconciliation between the liability recorded in the consolidated balance sheet and the balances of defined benefit obligation and

plan assets for the years ended March 31, 2019 and 2018, was as follows:


U.S. dollars

2019 2018 2019Funded defined benefit obligation ¥ 60,542 ¥ 61,246 $ 545,472Plan assets (65,781) (66,661) (592,675)Total (5,238) (5,414) (47,193)Unfunded defined benefit obligation 2,166 2,073 19,515Net (asset) liability arising from defined benefit obligation ¥ (3,071) ¥ (3,340) $ (27,669)

40


011_0293401371909.indd 40 2019/10/03 19:23:45


U.S. dollars

2019 2018 2019Liability for retirement benefits ¥ 2,785 ¥ 2,811 $ 25,092Asset for retirement benefits (5,857) (6,152) (52,770)Net (asset) liability arising from defined benefit obligation ¥ (3,071) ¥ (3,340) $ (27,669)

(d) The components of net periodic benefit costs for the years ended March 31, 2019 and 2018, were as follows:


U.S. dollars

2019 2018 2019Current service cost ¥ 1,862 ¥ 1,869 $ 16,776Interest cost 248 297 2,234 Expected return on plan assets (1,956) (1,953) (17,623)Recognized actuarial (gains) losses 1,209 1,350 10,892 Amortization of prior service costExtra retirement payments 0Net periodic benefit costs ¥ 1,363 ¥ 1,564 $ 12,280

(Note) Net periodic benefit costs of consolidated subsidiaries that adopted the simplified method were included in “Current service cost.”

(e) Amounts recognized in other comprehensive income (before income tax effect) in respect of defined retirement benefit plans for

the years ended March 31, 2019 and 2018, were as follows:


U.S. dollars

2019 2018 2019Prior service costActuarial (losses) gains ¥ (461) ¥ 112 $ (4,153)Total ¥ (461) ¥ 112 $ (4,153)

(f ) Amounts recognized in accumulated other comprehensive income (before income tax effect) in respect of defined retirement ben-

efit plans as of March 31, 2019 and 2018, were as follows:


U.S. dollars

2019 2018 2019Unrecognized prior service costUnrecognized actuarial (gains) losses ¥ 5,137 ¥ 4,675 $ 46,283Total ¥ 5,137 ¥ 4,675 $ 46,283

(g) Plan assets

a) Components of plan assets

Plan assets as of March 31, 2019 and 2018, consisted of the following:

2019 2018Debt investments 26% 26%Equity investments 24 24General account of life insurance companies 35 34Others 15 16Total 100% 100%

(Note) Retirement benefit trusts set against the corporate pension plans and lump-sum retirement benefit plans accounted for 16% of the total plan assets for the years ended March 31, 2019 and 2018.

41

011_0293401371909.indd 41 2019/10/03 19:23:45

b) Method of determining the expected rate of return on plan assets

The expected rate of return on plan assets was determined by considering investment performance in the past as well as consider-

ing distribution of plan assets currently and in the future and the long-term rates of return that were expected currently and in the

future from the various components of the plan assets.

(h) Assumptions used for the years ended March 31, 2019 and 2018, were set forth as follows:

2019 2018Discount rate 0.2% or 0.3% 0.3% or 0.4%Expected rate of return on plan assets:

Plan assets (excluding the retirement benefit trust) 3.0% or 3.5% 2.5% or 4.5%Retirement benefit trust 0.5% or 2.0% 0.5% or 4.0%

Expected rate of salary increase 3.6% or 5.8% 3.7% or 6.4%

11. Equit y

Japanese banks are subject to the Companies Act of Japan (the “Companies Act”) and the Banking Law. The significant provisions in

the Companies Act and the Banking Law that affect financial and accounting matters are summarized below:

(a) Dividends

Under the Companies Act, companies can pay dividends at any time during the fiscal year in addition to the year-end dividend upon

resolution at the shareholders’ meeting. For companies that meet certain criteria, such as (1) having the Board of Directors, (2) having

independent auditors, (3) having the Audit & Supervisory Board, and (4) the term of service of the directors is prescribed as one year

rather than two years of normal term by its articles of incorporation, the Board of Directors may declare dividends (except for dividends

in kind) at any time during the fiscal year if the company has prescribed so in its articles of incorporation. The Company meets all of the

above criteria.

The Companies Act permits companies to distribute dividends in kind (noncash assets) to shareholders, subject to a certain limita-

tion and additional requirements.

Semiannual interim dividends may also be paid once a year upon resolution by the Board of Directors if the articles of incorpora-

tion of the Company so stipulate. The Companies Act and the Banking Law provide certain limitations on the amounts available for

dividends or the purchase of treasury stock. The limitation is defined as the amount available for distribution to the shareholders, but

the amount of net assets after dividends must be maintained at no less than ¥3 million.

(b) Increases/decreases and transfer of common stock, reserve, and surplus

The Banking Law requires that an amount equal to 20% of dividends must be appropriated as a legal reserve (a component of retained

earnings) or as additional paid-in capital (a component of capital surplus) depending on the equity account charged upon the pay-

ment of such dividends until the aggregate amount of legal reserve and additional paid-in capital equals 100% of common stock. Under

the Companies Act, the total amount of additional paid-in common stock and legal reserve may be reversed without limitation. The

Companies Act also provides that common stock, legal reserve, additional paid-in capital, other capital surplus, and retained earnings can

be transferred among the accounts under certain conditions upon resolution by the shareholders.

(c) Treasury stock and treasury stock acquisition rights

The Companies Act also provides for companies to purchase treasury stock and dispose of such treasury stock upon resolution by the

Board of Directors. The amount of treasury stock purchased cannot exceed the amount available for distribution to the shareholders,

which is determined using a specific formula. Under the Companies Act, stock acquisition rights are presented as a separate com-

ponent of equity. The Companies Act also provides that companies can purchase both treasury stock acquisition rights and treasury

stock. Such treasury stock acquisition rights are presented as a separate component of equity or deducted directly from stock acquisi-

tion rights.

42


011_0293401371909.indd 42 2019/10/03 19:23:45

12 . O ther Income

Other income included gains on sales of stocks and other securities in the amount of ¥6,249 million ($56,302 thousand) and ¥5,747

million for the years ended March 31, 2019 and 2018, respectively.

13. Income Ta xes

The Group is subject to Japanese national and local income taxes, which, in the aggregate, resulted in a normal effective statutory tax

rate of approximately 30.4% and 30.6% for the years ended March 31, 2019 and 2018, respectively.

The tax effects of significant temporary differences and tax loss carryforwards that resulted in deferred tax assets and liabilities as of

March 31, 2019 and 2018, were as follows:


U.S. dollars

2019 2018 2019Deferred tax assets:

Reserve for possible loan losses ¥ 20,497 ¥ 19,947 $ 184,674 Liability for retirement benefits 2,981 2,988 26,858 Depreciation 1,303 1,311 11,739 Loss on impairment of securities 1,578 1,639 14,217 Losses on impairment of fixed assets 1,839 1,785 16,569 Deferred gains (losses) on derivatives under hedge accounting 3,457 819 31,146 Other 3,715 3,543 33,471

Subtotal 35,373 32,036 318,704Valuation allowance (4,827) (4,670) (43,490)

Deferred tax assets 30,545 27,366 275,204Deferred tax liabilities:

Unrealized gains on available-for-sale securities (34,580) (30,832) (311,559)Deferred income on fixed assets sold (252) (396) (2,270)Asset for retirement benefits (1,033) (1,227) (9,307)Valuation of assets (3,793) (3,478) (34,174)Other (27) (27) (243)

Deferred tax liabilities (39,687) (35,962) (357,572)Net deferred tax liabilities ¥ (9,141) ¥ (8,596) $ (82,358)

A reconciliation between the normal effective statutory tax rates and the actual effective tax rates reflected in the accompanying con-

solidated statement of income for the years ended March 31, 2019 and 2018, was as follows:

2019 2018Normal effective statutory tax rate 30.4% 30.6%

Expenses not deductible for income tax purposes 0.5 0.5Income not taxable for income tax purposes (1.3) (1.4)Valuation allowance 0.1 (0.1)Inhabitant taxes per capita 0.3 0.4Change in effective statutory tax rate 0.0Other-net 2.0 2.2

Actual effective tax rate 32.0% 32.2%

43

011_0293401371909.indd 43 2019/10/03 19:23:45

14. Financial Instruments and Related Disclosures

(a) Policy for financial instruments

The Group mainly provides banking services and other financial services, such as securities operations and credit card and leasing

services. In the banking services, the Group procures funds from deposits accepted from individual and corporate customers and from

short-term financial markets and manages such funds in the form of loans and investments in securities.

The Group holds substantial financial assets and liabilities that are subject to fluctuations in interest rates and prices. The Group

conducts Asset-Liability Management (ALM) on the assets and liabilities, including off-balance-sheet transactions of the Group, to

integrally monitor and control risks and to improve and stabilize profitability with the aim of protecting themselves from the negative

effects of the fluctuations. The Group also utilizes derivative transactions for this purpose.

(b) Nature and extent of risks arising from financial instruments

i) Financial assets

The significant proportion of financial assets held by the Group is loans, which are primarily provided to domestic corporations and

individual customers. Loans are subject to credit risk, which represents loss on default caused by deteriorated credit of the borrow-

ers. Additionally, fixed-interest-rate loans are subject to market risk and their fair value is exposed to risk of fluctuation in market

interest rate.

The second largest proportion of financial assets held by the Group is securities, which include domestic bonds, stocks, foreign

bonds, and investment trusts. Securities held by the Group are subject to market risk and their fair value is exposed to risk of fluctu-

ation in variable risk factors, including interest rates, stock prices, and exchange rates. The Group is also subject to the liquidity risk,

and its fair value is exposed to risk of fluctuation in market prices. Certain securities, such as stocks and bonds, are subject to credit

risk, which represents loss on default caused by deteriorated credit of the issuers.

ii) Financial liabilities

Deposits and marketable funds procured are subject to liquidity risk, which represents the outflow of deposits and an inability to

raise needed funds caused by deteriorated credit of the Group, as well as losses caused by having to make transactions under un-

favorable conditions. Certain Group’s companies raise funds by borrowing, which are subject to liquidity risk.

In addition, funds procured at fixed interest rates are subject to market risk and their fair value is exposed to risk of fluctuation

in market interest rate.

iii) Derivatives

The derivative transactions conducted by the Group include interest rate swaps and currency swaps. The Group applies deferred

hedge and specific matching criteria to transactions undertaken as hedges against risk and evaluates hedge effectiveness on the

basis of the market price fluctuation rate and the details of the contract. Derivative transactions are subject to credit risk associated

with the deteriorating credit standing of the counterparty, credit risk of default of the contract, and changing market risk imposed

by risk factors.

(c) Risk management for financial instruments

i) Basic risk management policy

The Group positions risk management as an important business challenge and enhances organization and system for managing

risk rigorously. By monitoring various types of risk properly and managing risk by responding to changing financial conditions ap-

propriately, the Group maintains and enhances the financial soundness of the Group and establishes a business foundation.

ii) Integrated risk management

The Group manages integrated risk in order to grasp and combine the various types of risks together in an integrated manner and

to manage it so that the overall volume of risk does not get too big for management to handle. In addition, the Group has intro-

duced a system for allocating risk capital within the range of shareholders’ equity as a provision against various types of risks, and is

taking steps to ensure management soundness and to raise profitability and efficiency.

44


011_0293401371909.indd 44 2019/10/03 19:23:45

a) Credit risk

The divisions in charge of credit examination and administration of loans have been separated from business promotion divisions,

and have been performing rigorous loan assessment and management under a system of mutual checks and balances. In addition,

with regard to credit portfolios, concentration on particular regions, businesses, companies, and groups within the credit portfolios

is appropriately managed.

A credit-rating system has been introduced to accurately grasp the creditworthiness of customers and to refine the credit risk

management, and is effectively utilized for determining lending policies and interest rates. The Group improves the accuracy of

self-assessment by establishing an independent division that performs audit and giving it the ability to perform checks and bal-

ances at branches and the division in charge of credit examination.

b) Market risk

The Group determines risk acceptance and risk hedge policies in the ALM committee and other committees based on interest rate

forecasts and profit targets through value at risk (VaR) method to ensure stable profitability.

Financial instruments influenced by interest rate risks are deposits; loans and bills discounted; and bonds and derivatives relat-

ed to interest rate. Financial instruments influenced by stock price volatility risks are bonds, stocks, mutual funds related to stocks,

and derivatives related to stocks. Higo Bank and Kagoshima Bank separately calculate and manage market risk.

Higo Bank calculates VaR based primarily on the historical simulation method (a holding period from 10 days to 6 months, a

confidence interval of 99%, and observation period of 5 years). As of March 31, 2019 and 2018, VaR related to interest rate risks was

¥6,800 million ($61,266 thousand) and ¥16,200 million and VaR related to price volatility risks was ¥17,200 million ($154,968 thou-

sand) and ¥17,300 million, respectively.

Kagoshima Bank calculates VaR based on the historical simulation method (a holding period of 10 days to 6 months, a con-

fidence interval of 99%, and observation period of 5 years). As of March 31, 2019 and 2018, VaR related to interest rate risks was

¥8,500 million ($76,583 thousand) and ¥12,700 million and VaR related to price volatility risks was ¥18,100 million ($163,077 thou-

sand) and ¥17,600 million, respectively.

Both banks perform back-testing to validate VaR periodically. However, VaR measures the amount of market risk by certain

occurrence probabilities, which are statistically calculated based on past market movements. Therefore, there are cases in which

VaR cannot capture risk under sudden and drastic changes in market beyond normal circumstances. The Group does not apply

quantitative analysis to certain financial instruments that are small in value and financial instruments held by certain consolidated

subsidiaries and affiliated companies.

c) Liquidity risk

Management department of liquidity risk grasps and analyzes the uses of funds on a daily, weekly, and monthly basis, and con-

ducts appropriate procurement of funds from the market, as necessary. In addition, to provide for contingencies, the Group has

established action plans and a reporting system, depending on the relative tightness of its cash position, so that it can swiftly re-

spond to any situation.

(d) Supplemental explanation for fair value of financial instruments

Fair values of financial instruments include market prices as well as reasonably calculated prices in cases where there are no market

prices available. As the calculations of the reasonably calculated prices are implemented under certain conditions and assumptions,

the result of calculations would differ if such calculations are made under different conditions and assumptions.

45

011_0293401371909.indd 45 2019/10/03 19:23:45

(e) Fair value of financial instruments

Fair values and carrying amounts of financial instruments as of March 31, 2019 and 2018, are shown below. Immaterial accounts in the

consolidated balance sheet are not included in the table below. Some instruments, such as unlisted stocks, whose fair values cannot

be reliably determined, are not included in the table below (see Note 14 (e) (Note 2)).

Millions of yen2019

Carrying amount Fair value

Net unrealizedgains (losses)

(1) Cash and due from banks ¥ 1,211,471 ¥ 1,211,471(2) Call loans and bills bought 314 314(3) Trading assets

Trading securities 1,183 1,183(4) Securities

Held-to-maturity debt securities 14,716 14,830 ¥ 114Available-for-sale securities 1,983,197 1,983,197

(5) Loans and bills discounted 6,853,138Reserve for possible loan losses (*1) (63,218)

6,789,919 6,847,057 57,137Total assets 10,000,803 10,058,054 57,251

(1) Deposits 8,567,557 8,568,115 558(2) Call money and bills sold(3) Payables under repurchase agreements 207,630 207,630(4) Borrowing under securities lending transactions 479,347 479,347(5) Borrowed money 402,402 402,406 4

Total liabilities 9,656,937 9,657,500 563

Derivatives (*2)For which hedge accounting is not applied 458 458For which hedge accounting is applied (11,423) (11,423)

Total ¥ (10,965) ¥ (10,965)

Millions of yen2018



(1) Cash and due from banks ¥ 926,404 ¥ 926,404(2) Call loans and bills bought 41,184 41,184(3) Trading assets


Held-to-maturity debt securities 14,763 14,812 ¥ 48Available-for-sale securities 2,277,417 2,277,417


6,385,099 6,428,783 43,684Total assets 9,648,290 9,692,023 43,733

(1) Deposits 8,572,993 8,573,950 956(2) Call money and bills sold(3) Payables under repurchase agreements 161,458 161,458(4) Borrowing under securities lending transactions 305,962 305,962(5) Borrowed money 299,159 299,144 (14)

Total liabilities 9,339,574 9,340,516 942

Derivatives (*2)For which hedge accounting is not applied 202 202For which hedge accounting is applied (2,696) (2,696)

Total ¥ (2,494) ¥ (2,494)

46


011_0293401371909.indd 46 2019/10/03 19:23:45




(1) Cash and due from banks $ 10,915,136 $ 10,915,136(2) Call loans and bills bought 2,829 2,829 (3) Trading assets


Held-to-maturity debt securities 132,588 133,615 $ 1,027Available-for-sale securities 17,868,249 17,868,249


61,175,952 61,690,755 514,794Total assets 90,105,441 90,621,263 515,821

(1) Deposits 77,192,152 77,197,179 5,027(2) Call money and bills sold(3) Payables under repurchase agreements 1,870,709 1,870,709(4) Borrowing under securities lending transactions 4,318,830 4,318,830(5) Borrowed money 3,625,569 3,625,605 36

Total liabilities 87,007,270 87,012,343 5,072

Derivatives (*2)For which hedge accounting is not applied 4,126 4,126For which hedge accounting is applied (102,919) (102,919)

Total $ (98,792) $ (98,792)

(*1) General reserve for possible loan losses and specific reserve for possible loan losses provided to loans and bills discounted are separately presented in the table above.

(*2) Derivatives recorded in trading assets, trading liabilities, other assets, and other liabilities are aggregated and shown herein. Assets and liabilities attributable to the derivative contracts are totally offset and the net liability position as a consequence of offsetting would be represented within brackets.

(Note 1) Valuation method of financial instruments

Assets

(1) Cash and due from banks

With regard to amounts due from banks without maturity and short-term (within one year) due from banks, as these instruments are

settled within a short term and their fair value and carrying amounts are nearly identical, their carrying amounts are assumed as their

fair value.

(2) Call loans and bills bought

As maturity of these instruments is within one year and their fair value and carrying amounts are nearly identical, their carrying

amounts are assumed as their fair value.

(3) Trading assets

The fair value of securities, such as debt securities held for trading purposes, is determined based on their prices quoted by the stock

exchanges or their quoted prices obtained from financial institutions.

(4) Securities

The fair value of equity securities is determined mainly based on their prices quoted by the stock exchanges. The fair value of bonds is

determined based on their prices quoted by the exchanges or at rates indicated by financial institutions handling these transactions

for the Group. The fair value of investment trusts is based on the base value publicly disclosed.

The fair value of privately placed bonds guaranteed by the Group is calculated using the same method as described in “(5) Loans

and bills discounted” accounted below.

For information pertaining to investment securities for holding purposes, please refer to Note 4.

47

011_0293401371909.indd 47 2019/10/03 19:23:45

(5) Loans and bills discounted

As loans bearing floating rates of interest reflect market rates of interest in the short term, unless credit conditions of the lending

entity have changed significantly after lending the loans, their fair value and carrying amounts are nearly identical, so their carrying

amounts are assumed as their fair value. Fixed-rate loans are segmented by loan type, internal rating, and period, and their fair value is

determined by discounting the total amount of principal and interest by the interest rate that consists of the swap rate and the credit

spread or the assumed interest rate on a new lending of the same type.

The fair value of loans lent to entities that are legally bankrupt, virtually bankrupt, or possibly bankrupt is determined according to

the current value of expected future cash flows or the amount of collateral that is expected to be recoverable and guarantee amounts

that are determined to be recoverable. As these amounts are nearly identical to the carrying amounts after deducting the allowance

for doubtful accounts, these amounts are assumed as their fair value.

For loans that are fully secured by collateral and that have no specified repayment term, as in terms of their expected repayment

periods and interest conditions, their fair value and carrying amounts are nearly identical, their carrying amounts are assumed as their

fair value.

Liabilities

(1) Deposits

For demand deposits, fair value is assumed as the amount to be paid when demanded on the consolidated balance sheet date (i.e.,

the carrying amounts). The fair value of time deposits and negotiable certificates of deposit is determined by segmenting such depos-

its by term and discounting future cash flows to their current value. The discount rate used is the rate of interest on new deposits of

the same type. For foreign currency time deposits, as the term is short (within one year) and their fair value and carrying amounts are

nearly identical, so their carrying amounts are assumed as their fair value.

(2) Call money and bills sold

As maturity of these instruments is within one year and their fair value and carrying amounts are nearly identical, their carrying

amounts are assumed as their fair value.

(3) Payables under repurchase agreements

As their remaining term is short (within one year) and their fair value and carrying amounts are nearly identical, their carrying amounts

are assumed as their fair value.

(4) Borrowing under securities lending transactions

As their remaining term is short (within one year) and their fair value and carrying amounts are nearly identical, their carrying amounts

are assumed as their fair value.

(5) Borrowed money

As borrowed money bearing floating rates of interest reflects market rates of interest in the short term, the credit conditions of the

Group have not changed significantly after lending the loans and their fair value and carrying amounts are nearly identical, their car-

rying amounts are assumed as their fair value. For those with fixed-rate interest, the fair value is determined by segmenting such bor-

rowed money by term and discounting the total amount of principal and interest by the rate of interest on new borrowings of the

same type. As for borrowed money that has a short repayment term (within one year), their carrying amounts are assumed as their fair

price, since its fair value and the carrying amount are nearly identical.

Derivatives

The information of the fair value for derivatives is included in Note 15.

48


011_0293401371909.indd 48 2019/10/03 19:23:46

(Note 2) Financial instruments whose fair value cannot be reliably determined

The following instruments are not included in “Assets (4) Securities” in the table above showing the fair value of financial instruments as

of March 31, 2019 and 2018:


U.S. dollars

2019 2018 2019Unlisted stocks (*1 and *2) ¥ 4,529 ¥ 4,015 $ 40,805Investments in partnerships and others (*3) 10,411 7,955 93,801Total ¥ 14,941 ¥ 11,971 $ 134,615

(*1) Fair value of unlisted stocks is exempt from disclosure because they do not have a market price and their fair value cannot be reliably determined.(*2) The Group wrote off unlisted stocks amounting to ¥2 million ($18 thousand) and ¥2 million for the years ended March 31, 2019 and 2018, respectively.(*3) Investments in partnerships and others, the assets of which comprise equity securities without a readily available market price, are out of the scope of

fair values disclosure because the fair value of those investments cannot be reliably determined.

(Note 3) Maturity analysis for claims and securities with contractual maturities as of March 31, 2019 and 2018

Millions of yen2019

Within 1 year 1 year to 3

years3 years to 5

years5 years to 7

years7 years to 10

yearsMore than 10

years

Due from banks ¥ 1,107,758Call loans and bills bought 314Securities

Held-to-maturity debt securities 2,966 ¥ 6,502 ¥ 4,695 ¥ 551Corporate bonds 2,966 6,502 4,695 551

Available-for-sale securities with maturity 316,622 330,597 165,788 139,221 ¥ 158,453 ¥ 639,656Japanese government bonds 158,861 135,859 30,075 23,322 133,384Municipal government bonds 27,453 35,012 20,767 23,200 45,501 84,891Short-term corporate bondsCorporate bonds 92,488 128,295 64,837 22,280 25,689 194,185

Loans and bills discounted (*1) 1,670,326 1,121,318 907,504 624,862 782,117 1,662,445Total ¥ 3,097,988 ¥ 1,458,417 ¥ 1,077,988 ¥ 764,635 ¥ 940,570 ¥ 2,302,102

Millions of yen2018


years3 years to 5

years5 years to 7

years7 years to 10

yearsMore than 10

years

Due from banks ¥ 836,290Call loans and bills bought 41,184Securities

Held-to-maturity debt securities 2,942 ¥ 7,059 ¥ 3,951 ¥ 810Corporate bonds 2,942 7,059 3,951 810

Available-for-sale securities with maturity 521,208 545,771 169,315 120,861 ¥ 176,426 ¥ 495,016Japanese government bonds 330,948 289,368 33,353 23,811 5,165 156,926Municipal government bonds 52,762 47,014 20,239 11,462 30,589 49,338Short-term corporate bonds 17,000Corporate bonds 95,732 162,765 84,066 33,396 10,733 164,467

Loans and bills discounted (*1) 1,580,017 1,064,670 869,786 593,688 727,363 1,524,218Total ¥ 2,981,642 ¥ 1,617,501 ¥ 1,043,054 ¥ 715,359 ¥ 903,789 ¥ 2,019,235

49

011_0293401371909.indd 49 2019/10/03 19:23:46



years3 years to 5

years5 years to 7

years7 years to 10

yearsMore than 10

years

Due from banks $ 9,980,700 Call loans and bills bought 2,829 Securities

Held-to-maturity debt securities 26,723 $ 58,581 $ 42,301 $ 4,964 Corporate bonds 26,723 58,581 42,301 4,964

Available-for-sale securities with maturity 2,852,707 2,978,619 1,493,720 1,254,356 $ 1,427,633 $ 5,763,185 Japanese government bonds 1,431,309 1,224,065 270,970 210,127 1,201,765 Municipal government bonds 247,346 315,451 187,106 209,027 409,955 764,852 Short-term corporate bonds Corporate bonds 833,300 1,155,914 584,169 200,738 231,453 1,749,572

Loans and bills discounted (*1) 15,049,337 10,102,874 8,176,448 5,629,894 7,046,733 14,978,331Total $ 27,912,316 $ 13,140,075 $ 9,712,478 $ 6,889,224 $ 8,474,367 $ 20,741,526

(*1) Of loans and bills discounted, the portion whose timing of collection is unforeseeable, such as loans to “Legally bankrupt” borrowers, loans to “Virtually bankrupt” borrowers, and loans to “Possibly bankruptcy” borrowers, amounting to ¥84,564 million ($761,906 thousand) (¥86,453 million in 2018), is not included in the table above.

(Note 4) Maturity analysis for interest-bearing liabilities as of March 31, 2019 and 2018

Millions of yen2019


years3 years to 5

years5 years to 7

years7 years to 10

yearsMore than 10

years

Deposits (*1) ¥ 8,338,765 ¥ 197,131 ¥ 25,855 ¥ 2,273 ¥ 3,530Call money and bills soldPayables under repurchase agreements 207,630Borrowing under securities lending

transactions 479,347Borrowed money 314,177 85,501 2,713 10

Total ¥ 9,339,920 ¥ 282,632 ¥ 28,569 ¥ 2,283 ¥ 3,530

Millions of yen2018


years3 years to 5

years5 years to 7

years7 years to 10

yearsMore than 10

years

Deposits (*1) ¥ 8,343,335 ¥ 200,579 ¥ 23,627 ¥ 1,253 ¥ 4,198Call money and bills soldPayables under repurchase agreements 161,458Borrowing under securities lending

transactions 305,962Borrowed money 180,590 38,276 80,262 30

Total ¥ 8,991,347 ¥ 238,855 ¥ 103,889 ¥ 1,283 ¥ 4,198



years3 years to 5

years5 years to 7

years7 years to 10

yearsMore than 10

years

Deposits (*1) $ 75,130,777 $ 1,776,114 $ 232,948 $ 20,479 $ 31,804 Call money and bills soldPayables under repurchase agreements 1,870,709 Borrowing under securities lending

transactions 4,318,830 Borrowed money 2,830,678 770,348 24,443 90

Total $ 84,151,004 $ 2,546,463 $ 257,401 $ 20,569 $ 31,804

(*1) Deposits on demand (current deposit, ordinary deposit, and deposit at notice) are included in “one year or less.”

50


011_0293401371909.indd 50 2019/10/03 19:23:46

15. Derivative Financial Instruments

(a) Derivative financial instruments used by the Group

The Group enters into transactions with interest rate swaps, currency swaps, and foreign exchange forward contracts.

The Group executes these derivative transactions in order to manage and hedge the risks associated with interest rate fluctuations

and exposure to changes in the market value of assets and liabilities held by the Group. In addition, the banks enter into derivative

transactions for trading purposes, within the position and loss limits established by the Group.

(b) Risks on derivative transactions

The major risks associated with derivative transactions, which have the potential to materially impact the Group’s financial condition,

are market and credit.

Market risk is related to the increase and decrease in the fair value of the positions held by the Group due to changes in the mar-

ket price and interest rates of the underlying assets. Market risk is also subject to changes in liquidity and the volatility of the markets.

Credit risk refers to possible losses on the positions held by the Group, which result from a counterparty’s failure to perform according

to the terms and conditions of the contract.

The banking consolidated subsidiaries mainly apply a quantitative measurement method in order to capture market risk. The bank-

ing consolidated subsidiaries monitor the outstanding balance and profit and loss for each type of transaction on a daily basis. In ad-

dition, the banking consolidated subsidiaries apply a “VaR” measurement method to transactions for which it is considered necessary

to apply a more sophisticated method. The Group manages credit risk by establishing credit limits for counterparties. Reviews of the

adequacy of established credit lines are made on a regular basis and as deemed necessary.

(c) Risk management system of the Group

The Group exercises and controls the derivative transactions using limits, including position limits, credit limits for each counterparty,

and stop-loss limits, in accordance with the Group’s policy on derivative transactions. Risks quantified are reported to the department

and the director responsible for monitoring the transactions and the Board of Directors. The front-office function and the back-office

function are segregated. The middle office is responsible for risk management and monitors front and back offices’ compliance with

regulations and internal rules.

Contract amounts or notional principal amounts of derivative financial instruments disclosed represent nominal contract amounts

or the notional principal amounts set up for the calculation of the settlement amounts. Generally, they do not represent the amounts

for which the actual assets are exchanged. These amounts do not represent, by themselves, the volume of market risk and credit risk

related to the underlying derivative financial instruments.

(d) Fair value of derivative financial instruments

Derivative transactions to which hedge accounting was not applied as of March 31, 2019 and 2018.

i) Interest rate-related transactions

There were no interest rate-related transactions as of March 31, 2019 and 2018.

ii) Foreign exchange-related transactions

Millions of yen2019

Contractual value or notional principal amount

Including more than one year Fair value

Unrealizedgains (losses)

Currency swaps ¥ 46,191 ¥ 23,780 ¥ 224 ¥ 69Foreign exchange forward contracts:

Selling 28,141 25 248 248Buying 10,852 23 (14) (14)

51

011_0293401371909.indd 51 2019/10/03 19:23:46

Millions of yen2018




Currency swaps ¥ 38,456 ¥ 31,733 ¥ 457 ¥ 187Foreign exchange forward contracts:

Selling 50,850 108 108Buying 12,236 (364) (364)





Currency swaps $ 416,172 $ 214,253 $ 2,018 $ 621Foreign exchange forward contracts:

Selling 253,545 225 2,234 2,234Buying 97,774 207 (126) (126)

Notes: 1. Derivative transactions shown above are stated at fair value in the accompanying consolidated financial statements. 2. Calculation or quotation of fair value of the above derivatives is based on the discounted present value method, etc.

Derivative transactions to which hedge accounting was applied as of March 31, 2019 and 2018

i) Interest rate-related transactions

Millions of yen2019

Hedged item



Deferred methodInterest rate swaps:

Receive floating and pay fixedLoans and bills discountedAvailable-for-sale securities(debt securities) ¥ 303,774 ¥ 259,461 ¥ (11,328)

Specific matching criteriaInterest rate swaps:

Receive fixed and pay floating Loans and bills discounted 7,320 7,320(Note 3)

Receive floating and pay fixed 88,386 83,583

Millions of yen2018

Hedged item




Receive floating and pay fixedLoans and bills discountedAvailable-for-sale securities(debt securities) ¥ 252,328 ¥ 218,503 ¥ (2,687)


Receive fixed and pay floating Loans and bills discounted 7,360 7,360 (Note 3)Receive floating and pay fixed 95,115 93,615

52


011_0293401371909.indd 52 2019/10/03 19:23:46


Hedged item




Receive floating and pay fixedLoans and bills discountedAvailable-for-sale securities(debt securities) $ 2,736,949 $ 2,337,697 $ (102,063)


Receive fixed and pay floating Loans and bills discounted 65,951 65,951 (Note 3)

Receive floating and pay fixed 796,342 753,067

Notes: 1. For the interest rate swaps shown above, deferred hedge accounting is applied in accordance with JICPA Industry Audit Committee Report No. 24, which was issued on February 13, 2002.

2. Fair values of the exchange traded derivatives are based on quoted market prices, such as those of Tokyo Financial Exchange, Inc. Calculation or quotation of fair value of the over-the-counter traded derivatives is based on the discounted present value method or option-

pricing models, etc. 3. The interest rate swaps that qualify for hedge accounting and meet specific matching criteria are not measured at market value, but the differential

paid or received under the swap agreements is recognized and included in interest expense or income. In addition, the fair value of such interest rate swaps is included in that of loans and bills discounted (the hedged items) stated in Note 14. Financial Instruments and Related Disclosures.

ii) Foreign exchange-related transactions

Millions of yen2019

Hedged item



Deferred methodCurrency swaps Loans and bills discounted ¥ 11,421 ¥ 11,421 ¥ (94)

Millions of yen2018

Hedged item



Deferred methodCurrency swaps Loans and bills discounted ¥ 1,589 ¥ 1,589 ¥ (8)


Hedged item



Deferred methodCurrency swaps Loans and bills discounted $ 102,901 $ 102,901 $ (846)

Notes: 1. For the currency swaps shown above, deferred hedge accounting is applied in accordance with JICPA Industry Audit Committee Report No. 2 5, which was issued on July 29, 2002.

2. Calculation of fair value of the above derivatives is based on the discounted present value method, etc.

53

011_0293401371909.indd 53 2019/10/03 19:23:46

16. O ther Comprehensive Income

The components of other comprehensive income for the years ended March 31, 2019 and 2018, were as follows:


U.S. dollars

2019 2018 2019Unrealized gains (losses) on available-for-sale securities:

Gains (losses) arising during the year ¥ 18,668 ¥ 2,198 $ 168,195Reclassification adjustments to profit or loss (3,250) 1,385 (29,281)Amount before income tax effect 15,418 3,584 138,913Income tax effect (4,710) (1,202) (42,436)

Total 10,708 2,381 96,477Deferred gains (losses) on derivatives under hedge accounting:

Gains (losses) arising during the year (10,235) 466 (92,215)Reclassification adjustments to profit or loss 1,558 1,981 14,037Amount before income tax effect (8,676) 2,447 (78,169)Income tax effect 2,637 (744) 23,758

Total (6,039) 1,703 (54,410)Defined retirement benefit plans:

Gains (losses) arising during the year (1,670) (1,237) (15,046)Reclassification adjustments to profit or loss 1,209 1,350 10,892Amount before income tax effect (461) 112 (4,153)Income tax effect 140 (34) 1,261

Total (321) 78 (2,892)Total other comprehensive income ¥ 4,347 ¥ 4,163 $ 39,165

17. Business Combinations

Transactions under common control

Additional acquisition of shares of consolidated subsidiaries

(a) Outline of the business combination

a) Name of parties to the business combination and their business outline

The Kagoshima Lease Co., Ltd. (leasing business and lending business)

Kagoshima Card Co., Ltd. (credit card business and credit guarantee business)

b) Date of the business combination

March 25, 2019

March 26, 2019

March 27, 2019

c) Legal form of the business combination

Share acquisition from noncontrolling interests

d) Name of the company after the business combination

Unchanged

e) Other matters concerning the transaction

The Company acquired part of common stock of the above consolidated subsidiaries from noncontrolling interests for the pur-

pose of strengthening integrated Group management.

54


011_0293401371909.indd 54 2019/10/03 19:23:46

(b) Overview of accounting treatments applied

These transactions are accounted for as transactions under common control in accordance with “Accounting Standard for Business

Combinations” issued on September 13, 2013 (Accounting Standards Board of Japan (ASBJ) Statement No. 21) and “Implementation

Guidance on Accounting Standard for Business Combinations and Accounting Standard for Business Divestitures” issued on September

13, 2013 (ASBJ Guidance No. 10).

(c) Matters concerning additional acquisition of shares of consolidated subsidiaries

Acquisition cost and its details:

Consideration for acquisition: Cash and due from banks ¥1,134 million ($10,217 thousand)

Acquisition cost: ¥1,134 million ($10,217 thousand)

(d) Matters concerning changes in equity interest of the company associated with the transactions with noncontrolling interests

a) Fluctuation factor of capital surplus

Additional acquisition of shares of consolidated subsidiaries

b) Amount of capital surplus increased resulting from the transactions with noncontrolling interests

¥4,249 million ($38,282 thousand)

18. Segment Information

Under ASBJ Statement No. 17, “Accounting Standard for Segment Information Disclosures,” and ASBJ Guidance No. 20, “Guidance on

Accounting Standard for Segment Information Disclosures,” an entity is required to report financial and descriptive information about

its reportable segments. Reportable segments are operating segments or aggregations of operating segments that meet specified

criteria. Operating segments are components of an entity about which separate financial information is available and such informa-

tion is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

Generally, segment information is required to be reported on the same basis as is used internally for evaluating operating segment

performance and deciding how to allocate resources to operating segments.

(a) Description of reportable segments

The Group’s reportable segments are those for which separate financial information is available and regular evaluation by the

Company’s management is being performed in order to decide how resources are allocated among the Group. Therefore, the Group’s

reportable segments consist of banking and leasing. Banking consists of deposit taking, lending, domestic and foreign exchange trans-

actions, and securities trading. Leasing consists of leasing and lending.

(b) Methods of measurement for the amounts of ordinary income, profit (loss), assets, and other items for each reportable segment

The accounting policies of each reportable segment are consistent with those disclosed in Note 2, “Summary of Significant Accounting

Policies.”

55

011_0293401371909.indd 55 2019/10/03 19:23:46

(c) Information about ordinary income, profit (loss), assets, and other items was as follows:

Millions of yen

2019

Reportable segment

Other Total Reconciliations Consolidated

Banking

Leasing TotalHigo Bank Kagoshima Bank Subtotal

Ordinary income:

Ordinary income by external customers ¥ 75,173 ¥ 64,288 ¥ 139,461 ¥ 28,829 ¥ 168,290 ¥ 5,006 ¥ 173,297 ¥ (2,974) ¥ 170,322

Intersegment ordinary income 485 931 1,416 1,681 3,098 4,277 7,375 (7,375)

Total ¥ 75,658 ¥ 65,219 ¥ 140,878 ¥ 30,510 ¥ 171,388 ¥ 9,284 ¥ 180,672 ¥ (10,350) ¥ 170,322

Segment profit ¥ 18,170 ¥ 17,418 ¥ 35,588 ¥ 1,596 ¥ 37,185 ¥ 1,125 ¥ 38,310 ¥ (4,592) ¥ 33,717

Segment assets 5,830,251 4,576,181 10,406,433 85,735 10,492,168 33,694 10,525,863 (81,273) 10,444,589

Other:

Depreciation 3,838 2,746 6,585 93 6,678 371 7,050 161 7,212

Interest income 52,412 48,434 100,846 59 100,906 208 101,114 (2,994) 98,120

Interest expenses 5,845 1,961 7,807 236 8,043 39 8,083 (322) 7,760

Increase in fixed assets and intangible assets 2,780 7,706 10,487 117 10,604 106 10,711 2,417 13,128

Notes: 1. Ordinary income means total income, less certain special income included in other income in the accompanying consolidated statement of income.

2. “Other” consists of other banking-related activities, such as credit card operations. 3. Reconciliations include items below: a. The reconciliations of ordinary income by external customers of ¥(2,974) million ($(26,795) thousand) include reconciliations of ordinary income

in accordance with purchase method application of ¥(2,979) million ($(26,840) thousand). b. The segment profit reconciliations of ¥(4,592) million ($(41,373) thousand) include reconciliations of profit in accordance with purchase method

application of ¥(3,766) million ($(33,930) thousand). c. The interest income reconciliations in “Other” of ¥(2,994) million ($(26,975) thousand) include reconciliations of interest income in accordance

with purchase method application of ¥(2,161) million ($(19,470) thousand). d. Reconciliations of segment assets and interest expenses were eliminations of intersegment transactions. Reconciliations of depreciation and

increase in fixed assets and intangible assets were reconciliations in lease investments assets. 4. Segment profit is reflected as an adjustment to ordinary profit in the consolidated statement of income.

Millions of yen

2018

Reportable segment


Banking


Ordinary income:

Ordinary income by external customers ¥ 70,043 ¥ 65,944 ¥ 135,987 ¥ 30,028 ¥ 166,016 ¥ 3,906 ¥ 169,923 ¥ (5,226) ¥ 164,696

Intersegment ordinary income 385 798 1,183 1,895 3,079 3,873 6,953 (6,953)

Total ¥ 70,428 ¥ 66,742 ¥ 137,171 ¥ 31,924 ¥ 169,096 ¥ 7,780 ¥ 176,876 ¥ (12,179) ¥ 164,696

Segment profit ¥ 17,971 ¥ 15,711 ¥ 33,682 ¥ 1,427 ¥ 35,109 ¥ 645 ¥ 35,755 ¥ (6,373) ¥ 29,381

Segment assets 5,585,720 4,465,441 10,051,161 84,615 10,135,777 29,581 10,165,359 (81,319) 10,084,039

Other:

Depreciation 4,347 2,789 7,136 89 7,225 294 7,520 159 7,679

Interest income 51,437 47,758 99,195 66 99,261 215 99,477 (3,708) 95,768

Interest expenses 5,263 2,151 7,415 236 7,651 35 7,687 (320) 7,367

Increase in fixed assets and intangible assets 3,276 4,120 7,397 14 7,411 564 7,975 1,944 9,919

Notes: 1. Ordinary income means total income, less certain special income included in other income in the accompanying consolidated statement of income.

2. “Other” consists of other banking-related activities, such as credit card operations. 3. Reconciliations include items below: a. The reconciliations of ordinary income by external customers of ¥(5,226) million include reconciliations of ordinary income in accordance with

purchase method application of ¥(5,089) million. b. The segment profit reconciliations of ¥(6,373) million include reconciliations of profit in accordance with purchase method application of ¥(5,556)

million thousand). c. The interest income reconciliations in “Other” of ¥(3,708) million include reconciliations of interest income in accordance with purchase method

application of ¥(2,906) million thousand). d. Reconciliations of segment assets and interest expenses were eliminations of intersegment transactions. Reconciliations of depreciation and

increase in fixed assets and intangible assets were reconciliations in lease investments assets. 4. Segment profit is reflected as an adjustment to ordinary profit in the consolidated statement of income.

56


011_0293401371909.indd 56 2019/10/03 19:23:46

Thousands of U.S. dollars

2019

Reportable segment


Banking


Ordinary income:

Ordinary income by external customers $ 677,295 $ 579,223 $ 1,256,518 $ 259,744 $ 1,516,262 $ 45,103 $ 1,561,374 $ (26,795) $ 1,534,570

Intersegment ordinary income 4,369 8,388 12,757 15,145 27,912 38,535 66,447 (66,447)

Total $ 681,665 $ 587,611 $ 1,269,285 $ 274,889 $ 1,544,175 $ 83,647 $ 1,627,822 $ (93,251) $ 1,534,570

Segment profit $ 163,708 $ 156,933 $ 320,641 $ 14,379 $ 335,030 $ 10,136 $ 345,166 $ (41,373) $ 303,784

Segment assets 52,529,516 41,230,570 93,760,095 772,456 94,532,552 303,576 94,836,138 (732,255) 94,103,874

Other:

Depreciation 34,579 24,740 59,329 837 60,167 3,342 63,519 1,450 64,978

Interest income 472,222 436,381 908,604 531 909,144 1,874 911,019 (26,975) 884,043

Interest expenses 52,662 17,668 70,339 2,126 72,465 351 72,826 (2,901) 69,916

Increase in fixed assets and intangible assets 25,047 69,429 94,485 1,054 95,540 955 96,504 21,776 118,280

Related information

(a) Segment information by service

Millions of yen2019

LendingSecurities

investment Leasing Others TotalOrdinary income by external customers ¥ 70,254 ¥ 43,087 ¥ 28,684 ¥ 28,296 ¥ 170,322

Millions of yen2018

LendingSecurities

investment Leasing Others TotalOrdinary income by external customers ¥ 69,501 ¥ 34,817 ¥ 29,798 ¥ 30,578 ¥ 164,696


LendingSecurities

investment Leasing Others TotalOrdinary income by external customers $ 632,975 $ 388,206 $ 258,437 $ 254,941 $ 1,534,570

Note: Instead of the net sales of a nonfinancial company, ordinary income is presented.

(b) Segment information by geographic area

Segment information by geographic area is not disclosed as more than 90% of the total consolidated ordinary income and tangible

fixed assets of the Group resides in Japan.

(c) Segment information by major customer

Segment information by major customers is not disclosed as there was no customer for which ordinary income was more than 10% of

total ordinary income.

57

011_0293401371909.indd 57 2019/10/03 19:23:46

19. Subsequent Events

(a) Appropriations of Retained Earnings

The following appropriation of retained earnings at March 31, 2019, was approved at the meeting of the Board of Directors held on

May 14, 2019:


U.S. dollars

Year-end cash dividends, ¥6.00 ($0.05) per share ¥ 2,709 $ 24,407

(b) Corporate acquisition via stock acquisition

The Higo Bank, Ltd., a subsidiary of the Company, resolved at its Board of Directors’ meeting held on July 9, 2019, to acquire 90% of

stock in JR Kyushu Financial Management Company from Kyushu Railway Company and concluded a stock transfer agreement on

August 5, 2019.

The Group conducted the stock acquisition to realize its management philosophy and vision to “become Kyushu’s top comprehensive

financial group for customers.” To this end, the Group rolled out its second Medium-Term Management Plan in April 2018.

Through this stock acquisition, the Group will work to further enhance its regional comprehensive financial functions and regional

industry development function, which are the strategic pillars of its Medium-Term Management Plan, to provide enriched solutions to

customers, which will in turn strengthen the Group’s management foundation and further improve corporate value.

The name of counterparty to the stock acquisition is Kyushu Railway Company, and the name, business, and scale of the acquiree are

as follows:

Name*: JR Kyushu Financial Management Company

Location: 1-5-1 Hakata-ekimae, Hakata-ku, Fukuoka

Position and name of representative: President: Ryota Nakano

Business: Comprehensive leasing business

Capital stock: ¥400 million ($3,603 thousand)

Date of establishment: July 12, 1988

*The entity was renamed JR Kyushu FG Lease, Inc. on October 2, 2019.

The date of the stock acquisition was October 2, 2019, and the number of shares acquired and shareholding ratio after the acquisition

were as follows:

Number of shares acquired: 7,200 shares

Shareholding ratio after acquisition: 90%

58


011_0293401371909.indd 58 2019/10/03 19:23:46

Independent Auditors’ Report

59

012_0293401371909.indd 59 2019/11/11 11:50:23


dollars

2019 2018 2019ASSETS:Cash and due from banks ¥ 945,255 ¥ 665,651 $ 8,516,578Call loans 314 40,326 2,829Monetary claims purchased 1,062 870 9,568Trading assets 273 452 2,459Money held in trust 4,841 4,848 43,616Securities 1,208,958 1,445,164 10,892,494Loans and bills discounted 3,488,486 3,246,496 31,430,633Foreign exchange assets 7,609 8,064 68,555Other assets 130,829 129,255 1,178,745Fixed assets 49,620 50,687 477,067Intangible assets 4,803 5,235 43,274Prepaid pension cost 2,610 2,637 23,515Customers’ liabilities for acceptances and guarantees 9,402 10,055 84,710Reserve for possible loan losses (22,299) (22,189) (200,909)

Total assets ¥ 5,831,767 ¥ 5,587,556 $ 52,543,175

LIABILITIES AND EQUITY:Liabilities:Deposits ¥ 4,623,028 ¥ 4,694,149 $ 41,652,653Payables under repurchase agreements 148,888 148,880 1,341,454Borrowing under securities lending transactions 406,595 222,512 3,663,348Trading liabilities 5Borrowed money 275,937 173,386 2,486,142Foreign exchange liabilities 74 40 666Other liabilities 47,033 25,992 423,758Reserve for retirement benefits 256 539 2,306Reserve for repayments for dormant deposits 1,206 1,156 10,865Reserve for contingent losses 260 243 2,342Deferred tax liabilities 3,207 3,337 28,894Deferred tax liabilities related to land revaluation 4,443 4,540 40,030Acceptances and guarantees 9,402 10,055 84,710


EquityCommon stock 18,128 18,128 163,330Capital surplus 8,133 8,133 73,276Retained earnings 248,025 238,030 2,234,660Valuation and translation adjustments:

Unrealized gains (losses) on available-for-sale securities 39,171 34,217 352,923Deferred gains (losses) on derivatives under hedge accounting (7,882) (1,866) (71,015)Excess of land revaluation 5,855 6,072 52,752

Total valuation and translation adjustments 37,143 38,423 334,651Total equity 311,432 302,716 2,805,946Total liabilities and equity ¥ 5,831,767 ¥ 5,587,556 $ 52,543,175

60

Non-Consolidated Financial Statements (Unaudited)The Higo Bank, Ltd.Non-Consolidated Balance SheetMarch 31, 2019 and 2018

012_0293401371909.indd 60 2019/11/11 11:50:24


dollars


Interest on loans and discounts ¥ 33,927 ¥ 33,341 $ 305,676 Interest and dividends on securities 18,165 17,820 163,663 Other interest income 320 274 2,883

Fees and commissions income 11,040 11,019 99,468 Trading income 32 5 288 Other operating income 7,261 2,666 65,420 Gain on disposal of fixed assets 5 1 45 Other income 4,910 5,299 44,238

Total income 75,663 70,429 681,710


Interest on deposits 377 657 3,396 Other interest expenses 5,468 4,606 49,265

Fees and commissions expenses 4,134 4,656 37,246 Other operating expenses 8,596 3,008 77,448 General and administrative expenses 36,810 38,178 331,651 Provision for possible loan losses 624 157 5,622 Losses on disposal of fixed assets 112 12 1,009 Losses on impairment of long-lived assets 43 63 387 Other expenses 1,477 1,193 13,307

Total expenses 57,644 52,532 519,362Income before income taxes 18,019 17,897 162,347Income taxes:

Current 5,447 5,851 49,076Deferred 77 (266) 693

Total income taxes 5,524 5,585 49,770Net income ¥ 12,495 ¥ 12,311 $ 112,577

61

The Higo Bank, Ltd.Non-Consolidated Statement of IncomeYears ended March 31, 2019 and 2018

012_0293401371909.indd 61 2019/11/11 11:50:24

Millions of yenCommon

stockCapital surplus

Retained earnings

Balance at April 1, 2017 ¥ 18,128 ¥ 8,133 ¥ 229,930Cash dividends (4,227)Net income 12,311Reversal of excess of land




Balance at March 31, 2019 ¥ 18,128 ¥ 8,133 ¥ 248,025

Millions of yenValuation and translation adjustments

Unrealized gains (losses)

on available-for-sale securities




Total valuation and translation

adjustmentsTotal

equity

Balance at April 1, 2017 ¥ 35,745 ¥ (3,498) ¥ 6,088 ¥ 38,334 ¥ 294,527Cash dividends (4,227)Net income 12,311Reversal of excess of land

revaluation 15Net change in the year (1,527) 1,632 (15) 88 88

Balance at April 1, 2018 ¥ 34,217 ¥ (1,866) ¥ 6,072 ¥ 38,423 ¥ 302,716Cash dividends (2,718)Net income 12,495Reversal of excess of land

revaluation 217Net change in the year 4,954 (6,016) (217) (1,279) (1,279)

Balance at March 31, 2019 ¥ 39,171 ¥ (7,882) ¥ 5,855 ¥ 37,143 ¥ 311,432

62

Non-Consolidated Financial Statements (Unaudited)

The Higo Bank, Ltd.Non-Consolidated Statement of Changes in EquityYears ended March 31, 2019 and 2018

012_0293401371909.indd 62 2019/11/11 11:50:24

Thousands of U.S. dollarsCommon


Retained earnings

Balance at April 1, 2018 $ 163,330 $ 73,276 $ 2,144,607Cash dividends (24,488)Net income 112,577 Reversal of excess of land

revaluation 1,955 Net change in the year

Balance at March 31, 2019 $ 163,330 $ 73,276 $ 2,234,660

Thousands of U.S. dollarsValuation and translation adjustments







adjustmentsTotal

equity

Balance at April 1, 2018 $ 308,289 $ (16,812) $ 54,707 $ 346,184 $ 2,727,416 Cash dividends (24,488)Net income 112,577 Reversal of excess of land

revaluation 1,955 Net change in the year 44,634 (54,203) (1,955) (11,523) (11,523)

Balance at March 31, 2019 $ 352,923 $ (71,015) $ 52,752 $ 334,651 $ 2,805,946

63

The Higo Bank, Ltd.Non-Consolidated Statement of Changes in EquityYears ended March 31, 2019 and 2018

012_0293401371909.indd 63 2019/11/11 11:50:24


dollars

2019 2018 2019ASSETS:Cash and due from banks ¥ 265,358 ¥ 260,314 $ 2,390,828Call loans 857Monetary claims purchased 9,495 8,968 85,548 Trading securities 910 2,974 8,198 Money held in trust 11,010 12,967 99,198 Securities 806,476 862,067 7,266,204 Loans and bills discounted 3,407,595 3,239,867 30,701,819 Foreign exchange assets 4,809 6,323 43,328 Other assets 20,429 23,211 184,061 Fixed assets 60,368 56,007 543,904 Intangible assets 3,733 3,618 33,633 Prepaid pension cost 8,600 8,788 77,484 Customers’ liabilities for acceptances and guarantees 24,002 23,741 216,253 Reserve for possible loan losses (42,775) (40,832) (385,395)

Total assets ¥ 4,580,015 ¥ 4,468,875 $ 41,265,113

LIABILITIES AND EQUITY:Liabilities:Deposits ¥ 3,958,284 ¥ 3,896,639 $ 35,663,429Payables under repurchase agreements 58,742 12,577 529,254 Borrowing under securities lending transactions 72,751 83,450 655,473 Borrowed money 110,453 110,037 995,161 Foreign exchange liabilities 97 81 873 Other liabilities 16,182 15,932 145,796 Reserve for retirement benefits 1,749 1,745 15,758 Reserve for repayments for dormant deposits 1,060 1,058 9,550 Reserve for contingent losses 223 245 2,009 Deferred tax liabilities 5,054 4,146 45,535 Deferred tax liabilities related to land revaluation 6,904 6,949 62,203 Acceptances and guarantees 24,002 23,741 216,253


EquityCommon stock 18,130 18,130 163,348 Capital surplus 11,204 11,204 100,946 Retained earnings 238,713 229,313 2,150,761 Valuation and translation adjustments:

Unrealized gains (losses) on available-for-sale securities 41,525 38,572 374,132 Deferred gains (losses) on derivatives under hedge accounting (33) (10) (297)Excess of land revaluation 14,964 15,058 134,822

Total valuation and translation adjustments 56,457 53,620 508,667 Total equity 324,506 312,269 2,923,740 Total liabilities and equity ¥ 4,580,015 ¥ 4,468,875 $ 41,265,113

64


THE KAGOSHIMA BANK, LTD.Non-Consolidated Balance SheetMarch 31, 2019 and 2018

012_0293401371909.indd 64 2019/11/11 11:50:24

Millions of yen Thousands of U.S.

dollars


Interest on loans and discounts ¥ 36,319 ¥ 36,119 $ 327,227 Interest and dividends on securities 12,017 11,543 108,271Other interest income 95 95 855

Fees and commissions income 10,333 10,213 93,098Other operating income 1,693 977 15,253Gain on disposal of fixed assets 106 955Other income 4,866 7,793 43,841

Total income 65,433 66,742 589,539


Interest on deposits 528 702 4,757Other interest expenses 1,433 1,449 12,911

Fees and commissions expenses 5,091 5,477 45,868Other operating expenses 1,762 4,403 15,875General and administrative expenses 34,291 34,416 308,955Provision for possible loan losses 2,690 3,539 24,236Losses on disposal of fixed assets 274 94 2,468Losses on impairment of long-lived assets 182 1,639Other expenses 2,111 1,044 19,019

Total expenses 48,365 51,125 435,759Income before income taxes 17,067 15,616 153,770Income taxes:

Current 5,670 4,272 51,085Deferred (627) 352 (5,649)

Total income taxes 5,042 4,624 45,427Net income ¥ 12,024 ¥ 10,991 $ 108,334

65

THE KAGOSHIMA BANK, LTD.Non-Consolidated Statement of IncomeYears ended March 31, 2019 and 2018

012_0293401371909.indd 65 2019/11/11 11:50:24

Millions of yenCommon


Retained earnings


revaluation (4)Net change in the year



Balance at March 31, 2019 ¥ 18,130 ¥ 11,204 ¥ 238,713

Millions of yenValuation and translation adjustments

Unrealized gains (losses)

on available-for-sale securities





adjustmentsTotal

equity

Balance at April 1, 2017 ¥ 38,931 ¥ (81) ¥ 15,053 ¥ 53,902 ¥ 305,791Cash dividends (4,227)Net income 10,991Reversal of excess of land

revaluation (4)Net change in the year (358) 71 4 (281) (281)

Balance at April 1, 2018 ¥ 38,572 ¥ (10) ¥ 15,058 ¥ 53,620 ¥ 312,269Cash dividends (2,718)Net income 12,024Reversal of excess of land

revaluation 93Net change in the year 2,952 (23) (93) 2,836 2,836

Balance at March 31, 2019 ¥ 41,525 ¥ (33) ¥ 14,964 ¥ 56,457 ¥ 324,506

66


THE KAGOSHIMA BANK, LTD.Non-Consolidated Statement of Changes in EquityYears ended March 31, 2019 and 2018

012_0293401371909.indd 66 2019/11/11 11:50:24

Thousands of U.S. dollarsCommon


Retained earnings

Balance at April 1, 2018 $ 163,348 $ 100,946 $ 2,066,069Cash dividends (24,488)Net income 108,334Reversal of excess of land


Balance at March 31, 2019 $ 163,348 $ 100,946 $ 2,150,761

Thousands of U.S. dollarsValuation and translation adjustments







adjustmentsTotal

equity

Balance at April 1, 2018 $ 347,526 $ (90) $ 135,669 $ 483,106 $ 2,813,487Cash dividends (24,488)Net income 108,334Reversal of excess of land

revaluation 837Net change in the year 26,596 (207) (837) 25,551 25,551

Balance at March 31, 2019 $ 374,132 $ (297) $ 134,822 $ 508,667 $ 2,923,740

67

THE KAGOSHIMA BANK, LTD.Non-Consolidated Statement of Changes in EquityYears ended March 31, 2019 and 2018

012_0293401371909.indd 67 2019/11/11 11:50:24

Network of the Kyushu Financial Group

The Higo Bank: 1 location The Kagoshima Bank: 1 location

Tokyo

The Higo Bank: 1 location The Kagoshima Bank: 1 location

Osaka

The Higo Bank: 1 locationThe Kagoshima Bank: 1 location

Shanghai(Representative Office)

The Kagoshima Bank: 1 location

Taipei(Representative Office)

General Meeting of Shareholders

Board of DirectorsNominating and

Remuneration Committee


Aud

it Division

Corp

orate Plann

ing

Division

Personn

al /

Gen

eral Aff

airs Division

Public Relation

s /

IR Division

Com

plian

ce and

Risk

Man

agem

ent D

ivision

Board of Corporate Auditors

Office of the Board of Corporate Auditors

Committees

Organizational Integration and Headquarters Building Construction CommitteeNew Business Development CommitteeDigital Innovation CommitteeComprehensive Budgeting CommitteeALM CommitteeCR Committee

Op

eration A

dm

inistration

and

IT Man

agem

ent D

ivision

Busin

ess Strategy D

ivision

Organizational Chart (As of October 1, 2019)


Corporate Data

68

012_0293401371909.indd 68 2019/11/11 11:50:24


The Kagoshima Bank: 136 locations (including online branches)The Higo Bank: 1 locationKyushu FG Securities:1 location

Kagoshima

The Higo Bank: 6 locations The Kagoshima Bank: 1 location

FukuokaThe Higo Bank: 1 location

Oita

The Higo Bank: 1 location

NagasakiThe Kagoshima Bank: 9 locations The Higo Bank: 1 location Kyushu FG Securities:1 location

Miyazaki

The Higo Bank: 111 locationsThe Kagoshima Bank: 1 locationKyushu FG Securities:2 location

Kumamoto

The Kagoshima Bank: 2 location

Okinawa

Total number of authorized shares Ordinary stock 1,000,000,000 shares

Total number of issued shares Ordinary stock 463,375,978 shares

Total Number of Shares

Principal shareholders

NameNumber of shares

(thousands)Equity stake

(%)

Iwasaki Ikuei Bunka Zaidan, General Foundation 20,936 4.63

Meiji Yasuda Life Insurance Co. 18,568 4.11

Japan Trustee & Services Bank, Ltd. (Trust account) 15,689 3.47

The Master Trust Bank of Japan, Ltd. (Trust account) 15,163 3.35

The Bank of Fukuoka, Ltd. 12,620 2.79

Japan Trustee & Services Bank, Ltd. (Trust account 9) 9,707 2.15

Takara Kogyo Co., Ltd. 8,258 1.82

Kagoshima Bank Employees' Shareholding Association 7,679 1.70

Iwasaki Sangyo Co., Ltd. 7,616 1.68

Nippon Life Insurance Company 7,361 1.63

(As of October 1, 2019)

69

012_0293401371909.indd 69 2019/11/11 11:50:24

2019Annual Report

Kyushu FG Securities 2019

Annual Report


Address of Main Branch6-6, Kinseicho, Kagoshima-shi, Kagoshima-ken, Japan 892-0828

Address of Headquarters1, Renpeicho, Chuo-ku, Kumamoto-shi, Kumamoto-ken, Japan 860-0017 Phone:(096)326-5588

web_010_0293401371909.indd 1 2019/11/19 9:16:11

annual report 2019the group established the 2nd medium-term management plan (integration stage) in...

Documents